Payday Loans
	 — 
	Question

Lord Kennedy of Southwark: To ask Her Majesty’s Government what further action they plan to take to tackle the issue of payday lending.

Viscount Younger of Leckie: As I highlighted in last week’s debate, the Government are deeply concerned at the evidence of consumer harm in the payday loans market. That is why the Government and regulators have jointly announced a strong action plan, with both immediate and longer-term measures. Tough enforcement and compliance action by the OFT now, combined with a move to a new regulatory regime equipped to deliver robust consumer protections in the future, will tackle the real concerns about this market.

Lord Kennedy of Southwark: My Lords, the most reverend Primate the Archbishop of Canterbury and I both called for a summit on payday lending in the debate last Thursday, so on the face of it the Government’s announcement is very good news. Then we get the announcement in the CSR today of the seven-day waiting period for benefits. That must have Wonga and the rest of the payday lenders jumping for joy. What assurance can the noble Viscount give the House that the summit is not a sham exercise and that something will actually come out of it?

Viscount Younger of Leckie: I welcome the noble Lord’s mention of the summit and am delighted that this will be an opportunity for the Government and regulators to take stock of progress in delivering on actions set out on 6 March. It will provide a firm forum for discussion of what more is needed to address the outstanding concerns, and I look forward the results. The announcement was made by my honourable friend Jo Swinson.

Baroness Gardner of Parkes: My Lords, is the Minister aware that there is a great lack of financial understanding among a lot of ordinary people, such as me, as to exactly what rates of interest are being charged? I then read in today’s paper of the worry about the shortfall that might occur with all the young people getting mortgages. The reason is the same: if interest rates go up they will find that they are out of pocket. Does he not think that it is terribly important for us to try to see that everyone has a degree of understanding of what they are letting themselves in for? People get terrible shocks with this payday lending in particular.

Viscount Younger of Leckie: My noble friend makes a very good point. This is precisely why the summit will, I hope, be helpful in highlighting the concerns. However, I stress that the Government have been taking some tough action and have given 50 firms—90% of the market—12 weeks to change their business practices or risk facing legal requirements or the loss of their licences. Two have already told the OFT that they are surrendering their licences. Since 6 March, the OFT has revoked the licences of three firms engaged in payday lending and has three further investigations open.

Lord Mitchell: Noble Lords will be as horrified as I was yesterday to discover that the leading online payday lending company has raised the interest rate on its loans from 4,214% to 5,853%. Religious leaders, community leaders and Members of both Houses of Parliament have begged the Government to cap interest rates, but they continue to refuse. Why is this? Could it be that some of the shareholders in some of the payday lending companies are also some of the donors to the Conservative Party?

Viscount Younger of Leckie: The Government remain very concerned by the evidence of harm in the payday loan market, but we do not think that the current evidence points to a cap on the cost of credit as a solution at this time. The Bristol report on high-cost credit indicates that a cap could have unintended consequences and risks harm, such as reducing consumers’ access to credit and leading to crime, lenders imposing new charges outside the cap, and less understanding shown to customers. Therefore, we do not agree that this is right or, indeed, that a ban would be right.

Lord Elystan-Morgan: My Lords, I will raise a purely legal point. Does the Minister accept that under the Consumer Credit Act 2006 there is substantial protection—potentially, at any rate—for a debtor who would otherwise suffer injustice? Under that Act, a judge is entitled, where he considers that there are unfair provisions in the loan contract or that the lender has acted in an unconscionable way, to deprive that creditor of relief or to rewrite the contract to make it fairer. Can the Minister show the House that such matters are brought constantly to the attention of judges, particularly district judges, who deal with these matters, so that such cases of gross unfairness are properly dealt with?

Viscount Younger of Leckie: The noble Lord is right to raise the issue of continuous payment authorities. The Government have real concerns about the way in which payday lenders can access money from their customers’ bank accounts. We have been pressing the industry on further transparency, and payday lending codes commit lenders to explaining clearly what a CPA is, how it works and how to cancel a CPA.

The Lord Bishop of Bristol: My Lords, given the Government’s racing willingness to import financial expertise from Canada, can my noble friend tell your Lordships’ House whether he has any plans, in the
	light of the forthcoming payday loan summit, to appraise and learn from the very good, robust and helpful code of practice developed in Canada, which covers such important issues as the non-rollover of loans, no multiple loans, and a responsible policy towards advertising such loans?

Viscount Younger of Leckie: The right reverend Prelate is right to point out that we can learn, as ever, from other countries. In the debate last week, my noble friend Lady Kramer made a valuable point about community development finance institutions. In the UK, the Prime Minister announced the co-operatives consolidation Bill in January 2012, and work on drafting the legislation has begun. The focus should be on credit unions and community-based credit access.

Baroness Kramer: My Lords, I am one of those who believe that a cap is workable. Can the Minister give me his assurance that at the summit that issue will be thoroughly discussed and considered and that the Government will not come to a judgment in advance on such a crucial question?

Viscount Younger of Leckie: I am very certain that it will be part of the discussions. I can give no guarantees, but the whole point of the summit is to discuss these important matters further.

Baroness Lister of Burtersett: My Lords, what action will the Government take to ensure that the monthly payment of universal credit on top of benefits now being delayed for a week does not send more people in poverty into the hands of payday lenders, as has been predicted?

Viscount Younger of Leckie: The noble Baroness makes a valuable point on the transition to universal credit. When it is complete, we estimate that there will be approximately 8 million universal credit claims. My colleagues in the DWP and the Treasury are working together to produce the right sort of advice, and they have made clear that some claimants might need additional help to budget. We are working with the advice sector to provide the appropriate advice.

Legal Aid
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	Question

Lord Bach: To ask Her Majesty’s Government whether, as a result of their plans to reform legal aid, defendants will be able to choose their own lawyer; and, if not, why not.

Lord McNally: My Lords, the reasoning behind the proposed changes is that they will ensure that contract holders have enough certainty about work volumes so that
	efficiencies and economies of scale are achievable. However, we are carefully considering the consultation responses to this proposal.

Lord Bach: My Lords, I thank the Minister for his Answer and confess to being somewhat—a little—encouraged by it. The choice of lawyer is an essential part of our criminal justice system, as of course is the presumption of innocence. Does the Minister agree with his right honourable friend the Lord Chancellor’s justification of the proposal to abolish choice of lawyer, given in a recent interview in the Law Society Gazette? That seemed to be based on the absurd principle of “too thick to pick”. Or, does he agree with his right honourable friend the Deputy Prime Minister and leader of his own party, who is quoted as saying last weekend that it would be “perverse” to go ahead with this proposal? He cannot agree with both. What is the Government’s position?

Lord McNally: The Government’s position is that we put forward a model for competition, as proposed in our transformed legal aid consultation. That said that the client would generally have no choice in the provider allocated to them but that, in exceptional circumstances, a client might be permitted to change their provider. We put that matter out for consultation. As I indicated in my Answer, we are now considering the responses to the consultation and will come forward with further proposals.

Lord Lloyd of Berwick: My Lords, does the noble Lord remember a letter that appeared in the Telegraph about a month ago signed by some 70 or more QCs? It said that the denial of choice in representation would lead to what they called a rapid and probably irreversible deterioration in the standards of representation. Does he accept that analysis? If so, is he happy with those consequences?

Lord McNally: No, my Lords. When one gets into one of these processes, those kinds of letters are sent to various distinguished newspapers and of course we take note of them. We are doing two things. We have never hidden the fact that part of what we are doing is because of financial constraints. The legal aid budget has to take its share of the burden of our spending cuts but we are trying to do that in a way that retains the fundamental access to justice. We have consulted very thoroughly. We have had some 16,000 responses, which we are working through. We will try to come back with constructive proposals, so long as the legal profession recognises that we have to make the savings that are necessary for the taxpayer.

Lord Marks of Henley-on-Thames: My Lords—

Baroness Scotland of Asthal: My Lords—

Lord Hill of Oareford: It is the Lib Dems and then we will come to the noble and learned Baroness.

Lord Marks of Henley-on-Thames: My Lords, it was a Labour Question to begin with. If the responses to the consultation demonstrate that there are savings to be made in other areas, particularly in the resource-hungry high-cost criminal cases, will my noble friend’s department use those savings to mitigate the harshness of the legal aid cuts in other areas where the effect of the proposed cuts is most serious?

Lord McNally: We are certainly looking across the piece and making decisions. Our current thinking is not to compete crown court advocacy and very high-cost crime cases. We have made separate proposals to reduce fees in this area, which are set out in the consultation. However, my noble friend is right. Under the current system, the most expensive single criminal legal aid case in 2010-12 cost the taxpayer £8.5 million. Under our present system, this would reduce to £6 million. The total cost to the taxpayer of just the top three cases in 2011-12 was £21 million.

Baroness Scotland of Asthal: My Lords, I understand that the Minister is able to disregard what 70 QCs have said in a newspaper, but will he tell the House whether the Government intend to disregard their current Attorney-General, who has expressed concerns and who remains the guardian of the public interest and the rule of law? Will they disregard him, too?

Lord McNally: On the contrary. The Attorney-General’s advice, which is invariably wise and measured, is taken fully into account in this consultation. I say again: we are going through a consultation and 69 QCs and 300 economists are part of this kind of exercise. Of course there is a free press, but in the end I hope that the legal profession will engage with us in a constructive dialogue. This will allow us to meet the realities of the economic situation in which we find ourselves, but also to meet the realities that were referred to about access to justice and the rule of law. These are important issues and sometimes they can be trivialised by wild statements about their implications.

Noble Lords: Shocking.

Lord McNally: Shocking? The last Labour manifesto said the party would cut legal aid. For three years, all that I have heard from the Opposition Benches is: “Not this bit of legal aid” or, “Not that bit of legal aid”. No wonder they got into the economic mess they did, because they are frightened of making a decision. We are not.

Lord Phillips of Sudbury: My Lords, my noble friend talked about economies of scale. Will he accept that there is an iron law in the legal profession: the bigger the firm, the bigger the fees? Will he have regard to local justice and the cost to somebody accused of a crime of having to travel miles away in order to see his or her nominated lawyer?

Lord McNally: These are extremely important issues. They have been raised in the consultation and we are considering them.

Flooding: Insurance
	 — 
	Question

Lord Knight of Weymouth: To ask Her Majesty’s Government what agreement they have reached with the insurance industry to ensure that owners of homes at risk of flooding can obtain affordable home insurance.

Lord De Mauley: My Lords, we are at an advanced stage in discussions with the insurance industry about the future of flood insurance. We aim to conclude those discussions and announce future measures as soon as possible to ensure that households can continue to access affordable flood insurance in the future.

Lord Knight of Weymouth: My Lords, the Secretary of State is currently struggling to agree a fair deal on CAP reform for UK farmers, and his department has one of the worst settlements in Whitehall in today’s CSR. I hope that he does a lot better for 200,000 householders in this negotiation with insurers. This House rises on the deadline for concluding the negotiation. Given the persistent interest from noble Lords on all sides, can the Minister therefore guarantee us an opportunity to question him in here on the conclusion of the negotiations before we break for the Recess?

Lord De Mauley: My Lords, I had hoped we might have a constructive debate about this. However, since the noble Lord has raised the common agricultural policy, perhaps I should say that it was Labour’s leadership in the last round of CAP reform that cost us €550 million in disallowance and led us to the disastrous administration of the single farm payment. We, by contrast, are tackling another immensely complex negotiation on flood insurance in a measured and sensible way. We have to balance the interests of those at high risk of flood, wider policyholders and taxpayers, while the ABI is a membership organisation with a lot of interests to represent. The noble Lord asks about an opportunity to debate the eventual outcome. I would be pleased about that; it is not my role to guarantee it, but I am sure that we will have a chance to do that.

The Earl of Selborne: My Lords, to bring the question back to flood insurance, has my noble friend looked at the precedent in America, and are there lessons to be learnt as to how to deal with flood insurance from the treatment of vulnerable homeowners in America?

Lord De Mauley: My Lords, that is something to which we have given considerable thought. However, international comparisons provide no clear model. The state-backed national disaster insurance system in the US was in debt to the taxpayer by $17 billion even before Hurricane Sandy struck. Emergency legislation was required in January 2013 to increase the fund’s borrowing by $9.7 billion when the scheme was days from running out of money, to enable claims to be paid. So we have considered it, but it has its limitations.

Lord Dubs: My Lords, given that previous deadlines have already been missed, as regards bringing the negotiations to a conclusion, what assurance can the Minister give that this will not be announced some time in the middle of August or September, when there is no chance for us to scrutinise the detail? Further, the Question uses the wording “affordable insurance”. Will he comment on the fact that after the Cockermouth floods, my insurance company for my house in Cumbria increased my premium more than sixfold?

Lord De Mauley: Yes, my Lords. In answer to the noble Lord’s first question, the ABI, in its letter to which we referred when we last debated this subject a month ago, has expressed confidence that we will be able to conclude this before the end of July, and I have every confidence in that. We need a solution that provides affordable insurance, as the noble Lord said, for those at risk, but that does not place unsustainable costs on wider policyholders or the taxpayer. Obtaining insurance might involve some householders shopping around or going through specialist brokers if flood risks are significant. In terms of help for householders, in July last year, we published a guide to obtaining flood insurance in high-risk areas in collaboration with the National Flood Forum and industry representatives.

Lord Greaves: My Lords, I heard this morning a rustling in the undergrowth, and it was not oncoming water: it was a suggestion that an agreement has actually now been reached between the Association of British Insurers and Defra—the Government. I do not know whether the Minister is able to confirm that, because it has perhaps has not been signed, sealed and delivered yet, but the agreement is there. When that news arrives—perhaps tomorrow—will it be given by an Oral Statement? That would then allow the Opposition in this House to have the Statement taken here, which would be the normal procedure, but can happen only if it is an Oral Statement?

Lord De Mauley: My Lords, my noble friend is unique among your Lordships in that he seems to have both ears to the ground at the same time. As I said, we are at an advanced stage in discussions with the insurance industry about the future of flood insurance. We aim to announce future measures shortly to ensure that households can continue to access affordable flood insurance.

Lord Campbell-Savours: My Lords, why should not all policyholders carry the risk? It would mean a very marginal difference in premiums.

Lord De Mauley: Yes, my Lords. We are trying to arrange a system where those at the highest risk who have difficulty affording the insurance effectively have a continued cross-subsidy from wider policyholders. It is a very complicated negotiation, as I think that the noble Lord is effectively pointing out, and we have a lot of interests to keep in mind here.

Lord Elton: Would the negotiations be made easier if the Government decided and announced that any agreement to insure flood-risk property would not extend to any property on flood plains for the building of which planning permission had been given after, let us say, today’s date?

Lord De Mauley: My noble friend is persistent in raising this issue. The Environment Agency provides advice to local planning authorities on the flood risk associated with new developments, which is used to develop strategic flood-risk assessments. During 2012-13, 99% of planning objections raised by the Environment Agency were amended in line with the advice of the NPPF. Where development is allowed because the risk is low, the proposed development should be designed to ensure that it is safe even in a one-in-1,000-year-scale flood.

Genetically Modified Crops
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	Question

Lord Taverne: To ask Her Majesty’s Government what progress they have made in seeking to reform the regulations regarding the commercial cultivation of genetically modified crops.

Lord De Mauley: My Lords, the EU has robust and comprehensive regulations governing GM crops. These regulations were designed to provide fair and predictable market access for products that have undergone a rigorous, case-by-case safety assessment. In practice, polarised views across EU member states mean that the scientific evidence is often ignored and crops remain stuck in the system. It is therefore difficult to make progress on this issue.

Lord Taverne: I should declare an interest as founder of the charity, Sense About Science. Over 14 years ago, several reports from the Royal Society, supported by every single national academy of sciences in the world, concluded that GM crops were no danger and caused no harm to human health or the environment. Since then, the enormous expansion in the cultivation of GM crops outside Europe and especially in emerging countries has strongly reinforced that conclusion. Will my noble friend convey to the Secretary of State congratulations on basing policy on evidence? Will he assure us that the Government will stand firm against the scaremongering of the Daily Mail, our leading anti-science paper, and recognise that its attacks on GM crops have no more evidence to support them than its disgraceful and scandalous campaign against MMR vaccines?

Lord De Mauley: My Lords, first, let me say that my noble friend has a great deal of knowledge in the area of science and GM specifically. His science-based approach is very welcome. I agree with what he says. That is why, despite the difficulties, we will work to
	unblock the situation. As my right honourable friend the Secretary of State says, we are going to need all the tools in the box to feed the rapidly growing world population. As he also says, we want the United Kingdom to have a leading role in feeding the world and increasing the resilience of global food supplies, and not to stand by watching others take the lead and forge ahead. The UK is the natural home for scientific research. We want companies and research providers to know that the UK is the best place for them to carry out their work.

Lord Winston: My Lords, I am sure that it will not have escaped the Minister’s attention that a number of your Lordships’ House are genetically modified. When it comes to plants, does he not agree that there is colossal evidence that, given the shortage of water in the world and of food in many countries, the need for genetically modified plants is ever increasing and that this is an important technology to help many people who are starving?

Lord De Mauley: Yes, my Lords, yes and yes.

Lord Walton of Detchant: My Lords, as the noble Lord, Lord Taverne, has said, there is no shred of scientific evidence to suggest that GM foods carry any risk to human health. All talk in the media of “Frankenstein foods” is nonsense. Many GM crops have been cultivated with improvement in the quality of the crops and in their yields in many countries across the world. Is it not now perverse and misguided for the European Union, for instance, to have imposed a ban on the cultivation of GM crops? Can we do better?

Lord De Mauley: The noble Lord makes a really important point. My right honourable friend the Secretary of State and I have discussed this issue with Commissioner Borg in order to emphasise the importance of finding a solution that gets the current system working. The commissioner has signalled that he wants to try to resolve the problems at European level and we look forward to further discussions on this issue.

Viscount Ridley: My Lords, can my noble friend explain why, for 20 years, a group of environmental activists has been allowed to deny the British consumer choice in this matter: the choice to buy GM crops if they prefer them because they think they are good for human health and the environment?

Lord De Mauley: My noble friend is quite right that there are groups—interests—that have been successful in creating controversy around GM which has devalued the public debate and means that people have not been able to reach a balanced view of the pros and cons. We will strive to change that.

Baroness Hayman: My Lords, will the Minister undertake to express to his right honourable friend the Secretary of State the strength of support in this House for the science and evidence-based approach
	that he is advocating and wish him luck in the European Union in taking that forward? Would it not be truly irresponsible, given the need, as he has said, to cope with a rapidly expanding and often malnourished and starving population, not to take the opportunities offered by GM and by the independent scientific expertise in this country to move forward and save lives, as GM cotton manufacture has saved the lives of agricultural workers across the world?

Lord De Mauley: I agree with the noble Baroness. I am extremely grateful to her and other noble Lords who have spoken positively today, and I will certainly take her words and the words of other noble Lords back to my right honourable friend.

Baroness O'Cathain: My Lords, in all this euphoria about GM crops—and I think it is wonderful that at last we have some positive news—let us not forget that there are areas in the world that are going to be badly affected by this because the plants do not produce seeds on the same basis as current crops. I suggest that in all discussions that go on about this, particularly with the European Union, steps should be taken to ensure that the people who are going to make a lot of money out of these GM crops, such as seed merchants, do something to help those people in other areas in the world who will not be able to do the usual agriculture they have at the moment. We just cannot lose sight of that. I would like him to make sure that that will happen.

Lord De Mauley: My noble friend raises an issue that is known as “terminator technology”; that is, the concept that seeds may not reproduce. Terminator technology is a concept rather than something that is being applied in practice. There are no GM crops in existence, to my knowledge, that produce sterile seed and no plans to market such crops.

Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013
	 — 
	Motion to Approve

Moved by Lord De Mauley
	That the draft Water Industry (Specified Infrastructure Projects) (English Undertakers) Regulations 2013 laid before the House on 15 May be approved.
	Relevant documents: 2nd Report from the Joint Committee on Statutory Instruments, 3rd Report from the Secondary Legislation Scrutiny Committee, considered in Grand Committee on 12 June
	Motion agreed.

Spending Review
	 — 
	Statement

Lord Deighton: My Lords, I refer the House to the spending review Statement made earlier in another place by my right honourable friend the Chancellor of the Exchequer. Copies of the document have been made available in the Printed Paper Office and its text will be printed in full in the Official Report. I commend my right honourable friend’s Statement to this House.
	“This coalition came into office with a commitment to address with firmness and resolve one of the biggest economic crises of the post-war era. The action we have taken, together with the British people, has brought the deficit down by a third, helped a record number of people into work, and taken our economy back from the brink of bankruptcy; and it allows us to say that, while recovery from such a deep recession can never be straightforward, Britain is moving out of intensive care, and from rescue to recovery.
	Today we announce the latest action to secure the recovery. We act on behalf of every taxpayer and every future taxpayer who wants high-quality public services at a price our country can afford. We act on behalf of everyone who knows that Britain has got to live within its means. We have applied three principles to the spending round I will set out today: reform, to get more from every pound we spend; growth, to give Britain the education, enterprise and economic infrastructure it needs to win the global race; and fairness, making sure we are all in it together by ensuring those with the broadest shoulders bear the largest burden and making sure the unfairness of the something-for-nothing culture in our welfare system is changed.
	We have always understood that the greatest unfairness was loading debts on to our children that our generation did not have the courage to tackle ourselves. We have always believed, against much opposition, that it is possible to get better public services at lower cost—that you can cut bureaucracy and boost enterprise by taking burdens off the back of business. In the face of all the evidence, the opposition to these ideas has collapsed into incoherence. We have always believed that the deficit mattered—that we needed to take tough decisions to deal with our debts—and the opposition to that has collapsed into incoherence too. Today I announce the next stage of our economic plan to turn Britain around.
	Let me start with the overall picture on spending. In their last year in office, the previous Government were borrowing £1 in every £4 that they spent. It was a record for a British Government in peacetime and a calamitous risk with our economic stability. As the note we saw again this week from their outgoing Chief Secretary put it,
	“I’m afraid there is no money”.
	So we acted immediately. Three years ago, we set out plans to make savings and to reduce our borrowing. Instead of the £157 billion the last Government were borrowing, this year we are set to borrow £108 billion pounds: that is £49 billion less in borrowing. That is virtually the entire education budget.
	So we have made real progress, putting right what went so badly wrong. But while we have been acting, the challenges from abroad have grown: a eurozone in crisis, rising oil prices, and the damage from our own banking crisis worse than anyone feared. The truth is that we have to deal with the world as it is, not as we would wish it to be, so this country has to continue to make savings. I can report to the House that the biggest single saving we have made in government is the £6 billion a year less we are paying to service our debts than the previous Government budgeted for. Bear that number in mind when you hear the Opposition complaining about cuts.
	The deficit has come down by a third, yet at over 7% it remains far too high, so we must continue to take action—not just because it is wrong to go on adding debts to our children’s shoulders, but because we know from the global turbulence of the past few years that the economic risks are real and the recovery has to be sustained. If we abandoned our deficit plan, Britain would be back in intensive care. So the figures today show that until 2017-18, total managed expenditure —in other words, the total amount of government spending—will continue to fall in real terms at the same average rate as it is falling today.
	The task before us today is to spell out what that means for 2015-16. Total managed expenditure will be £745 billion. To put that huge sum into context, consider this: if government spending had been allowed to rise through this Parliament at the average rate of the past three decades, that total would have been £120 billion higher. This Government have taken unprecedented steps to achieve that expenditure control. Now we need to find £11.5 billion of further savings. I want to pay a personal tribute to my right honourable friend the Chief Secretary for the huge effort that he has put into delivering them. Finding savings on that scale has not been easy. These are difficult decisions that will affect people in our country, but there never was an easy way to bring spending under control. Reform, growth and fairness are the principles. Let me take each in turn.
	I will start with reform and the obligation that we all have in this House to ensure that we get more for every pound of taxpayers’ money that we spend. With the help of my right honourable friend the Minister for the Cabinet Office, we have been combing through Whitehall, driving out costs, renegotiating contracts and reducing the size of government. Cutting money that the previous Government were spending on marketing and consultants, reforming government IT and negotiating harder on behalf of the taxpayer have already saved almost £5 billion. In this spending round, we will find a further £5 billion of efficiency savings. That is nearly half of the total savings we need to achieve.
	We are reforming pay in the public sector. We are holding down pay awards, and public sector pay rises will be limited to an average of up to 1% for 2015-16. However, the biggest reform that we will make on pay is to automatic progression pay. That is the practice whereby many employees not only get a pay rise every year, but automatically move up a pay grade every single year, regardless of performance. Some public sector employees see annual pay rises of 7%. Progression
	pay can at best be described as antiquated; at worst, it is deeply unfair to other parts of the public sector that do not get it and to the private sector that has to pay for it. So we will end automatic progression pay in the Civil Service by 2015-16, and we are working to remove automatic pay rises simply for time served in our schools, NHS, prisons and police. The Armed Forces will be excluded from those reforms.
	Keeping pay awards down and ending automatic progression pay means that, for every pound we have to save in central administration, we can better limit job losses. I do not want to disguise from the House that there will be further reductions in the number of people working in the public sector. The Office for Budget Responsibility has forecast that the total number of people working for the Government will fall by a further 144,000 by 2015-16. I know that for those who are affected that is difficult. That is the consequence of the country spending far beyond its means.
	When I presented the spending round three years ago, I said that about half a million posts in the public sector were forecast to have to go. That is indeed what has happened, and we are saving £2 billion a year, with a Civil Service now smaller than at any time since the war. I also said three years ago that I was confident that job creation in the private sector would more than make up for the losses. That prediction created more controversy than almost anything else at the time, including with the Opposition. The shadow Chancellor called it “a complete fantasy”. Instead, every job lost in the public sector has been offset by three new jobs in the private sector. In the past year, five new jobs have been created for every job cut in the public sector. The central argument of those who fought against our plan is completely demolished by the ingenuity, enterprise and ambition of Britain’s businesses. I pay tribute to the hard-working people of this country who proved their pessimism wrong.
	In this spending round, the Treasury will, as one would expect, lead by example. In 2015-16, our resource budget will be reduced by 10%. The Cabinet Office will also see its resource budget reduced by 10%. However, within that we will continue to fund support for social action, including the National Citizen Service. Ninety thousand places will be available for young adults in the citizen service next year, rising to 150,000 by 2016. It is a fantastic programme that teaches young people about their responsibilities as well as their rights, and we are expanding it.
	Local government will have to make further savings too. My right honourable friend the Communities and Local Government Secretary has set an example to all his colleagues in reducing the size of his department by 60% and abolishing 12 quangos. He is a model of lean government, and has agreed to a further 10% saving in his resource budget. But we are committing to more than £3 billion capital investment in affordable housing and we will extend the troubled families programme to reach 400,000 more vulnerable families who need extra support. We are proving that it is possible to save money and create more progressive government. That is the right priority.
	Here is another of the Government’s priorities: helping families with the cost of living. Because we know that times are tough, we have helped to keep
	mortgage rates low, increased the personal allowance, cut fuel duty and frozen council tax. That council tax freeze is due to come to an end next April. I do not want that to happen, so I can tell the House today that because of the savings we have made we can help families with their bills. We will fund councils to freeze council tax for the next two years. That is nearly £100 off the average council tax bill for families, and brings savings on these bills for families to £600 over this Parliament. That demonstrates our commitment to all those who want to work hard and get on.
	There is one more thing that we can do to help with the cost of living in one part of the country. For years, Members from the south-west of England have fought on behalf of their constituents who face exceptionally high water bills. Nothing was done until we came to office. Now we have cut those water bills by £50 per household every year until 2015. My honourable friend the Member for Camborne and Redruth and many others have campaigned to extend that rebate beyond 2015. I am happy to confirm today that we will do that. Taking money out of the cost of government and putting it in the pockets of families—that is what we mean by reform.
	Local government has already taken difficult decisions to reduce staff numbers, share services and make savings. I pay tribute to Sir Merrick Cockell for all he has done in showing how this can be achieved. We were told by the scaremongers that savings in local government would decimate local services. Instead, public satisfaction with local council services has gone up under this Government. That is because, with our reforms, communities have more control over their own destiny. That is because we have devolved power and responsibility to manage budgets locally. That is because we have let councils benefit from the tax receipts that come when the local economy grows. Today, we give more freedom, including greater flexibility over assets, and we will drive greater integration of local emergency services. I thank my honourable friend the Member for Bournemouth East for his fresh thinking in this area, which has helped to inform us.
	We are also embarking on major reforms to the way we spend money locally through the creation of the single local growth fund that Lord Heseltine proposed. This will be £2 billion per year, which is at least £10 billion over the next Parliament. Local enterprise partnerships can bid for that sum, and the details will be set out tomorrow. Our philosophy is simple: trust people to make their own decisions and they will usually make better decisions. But in return for those freedoms, we have to ask local government for the kind of sacrifices central government are making. The local government resource budget will be reduced by 10% in 2015-16, but when all the changes affecting local government that I will set out are taken into account, including local income and other central government funding, local government spending reduces by around 2%.
	I set out today the block grants to the devolved Administrations. Because we have prioritised health and schools in England, this feeds through the Barnett formula to require resource savings of about 2% in Scotland, Wales and Northern Ireland. The Scottish
	resource budget will be set at £25.7 billion, and Scotland will benefit from new capital borrowing powers of almost £300 million. Being part of the UK means that Scotland will see its capital spending power increase by almost 13% in real terms in 2015-16. It is rightly for the Scottish Parliament to decide how best to use it. That is devolution within a United Kingdom delivering for Scotland.
	The Welsh resource budget will be £13.6 billion, and we will shortly publish our response to the Silk commission on further devolution of taxation and borrowing. When we do so, we will be able to say more about the impressive plans to improve the M4 in south Wales that my honourable friend the Member for Vale of Glamorgan and others have been campaigning for. The Northern Ireland resource budget will be £9.6 billion. We have agreed to provide an additional £31 million in 2015 to help the Police Service of Northern Ireland tackle the threat posed by terrorism. Those police officers do an incredibly brave job on our behalf, and we salute them. Separately, we will make 10% savings to the Scotland, Wales and Northern Ireland Offices.
	We believe that the cultural heritage of our nations is not just an economic asset, but has intrinsic value. When times are tough, they too must make a contribution to the savings this country requires. The Department for Culture, Media and Sport will make savings of 7% in its resource budget. Elite sports will be protected and the funding of community sports, arts and museums will be reduced by just 5%, but because we recognise the value of our greatest museums, galleries and English Heritage, we are giving them much greater freedom from state control, which they have long called for, applying our reforming principles across the board and empowering those on the front line who know best—what the director of the British Museum called:
	“good news in a tough economic climate”.
	And while we are at it, we will make sure that the site of the Battle of Waterloo is restored in time for the 200th anniversary to commemorate those who died there and to celebrate a great victory of coalition forces over a discredited former regime that impoverished millions.
	We still have the finest Armed Forces in the world, and we intend to keep it that way. The first line of national defence is sound public finances and a balanced defence budget, and my right honourable friend the Defence Secretary is helping to deliver both. He and his predecessor, my right honourable friend the Member for North Somerset, have filled the £38 billion black hole they inherited in the finances of the Ministry of Defence. We will continue to ensure we get maximum value for money from what will remain, which, at over 2% of our GDP, is one of the largest defence budgets in the world. The defence resource budget will be maintained in cash terms at £24 billion, while the equipment budget will be £14 billion and will grow by 1% in real terms thereafter. We will further reduce the civilian workforce and their allowances; renegotiate more of the hopeless private finance initiative contracts signed in the past decade; and overhaul the way we buy equipment.
	My right honourable friend the Prime Minister has rightly been clear throughout, however, that he is not prepared to see a reduction in Britain’s military capabilities. This spending round not only protects those capabilities, but enhances them with the latest technologies. We will not cut the number of soldiers, sailors or airmen—we need them to defend our country—and we will give them the best kit to do that job: new aircraft carriers, submarines, stealth fighters, destroyers and state-of-the art armoured vehicles. We also make a major commitment to invest in cyber. It is the new frontier of defence and a priority for the Government.
	We will look after families who have lost their loved ones and those injured protecting us long after the wars they fought in are over. We previously committed to fund the military covenant for five years, and today I commit to funding the Armed Forces covenant permanently. We will do that with the money we have collected from the LIBOR fines, so those who represented the very worst values will support those who represent the very best of British values. Our veterans will not be forgotten.
	The intelligence services are on the front line too. Silently, and often heroically, these fellow citizens protect us and our way of life, and so we will protect them in return, with a 3.4% increase in their combined resource budget. The Foreign Office is the public face of our diplomacy, and my right honourable friend the Member for Richmond (Yorks) is quite simply the best Foreign Secretary we have had in a generation. He, too, has demonstrated how we can make our taxpayer pound go further. While making savings in his budget, he has managed to expand our network of embassies in the emerging world and focus his diplomats on British commercial interests. There will be further savings in that budget of 8% in 2015, but he is still committing to strengthen our embassy network in high-growth markets, from Shanghai to Abuja.
	The Foreign Office projects our values abroad, and the Home Office protects our values here in Britain. Police reform is a model of what we can achieve across Government. Police forces are more accountable to the public, with modern working practices, the latest equipment and democratic oversight, and all that on a smaller budget. What was the Opposition’s prediction? They said that crime would rise, and what has happened instead? Crime has fallen by more than 10%. Thanks to the hard work of police officers up and down this country, crime is at its lowest level for 30 years. What was their prediction about our borders? They said that because of cuts we would not be able to control immigration, and what has happened instead? Net immigration is down by more than one third.
	This Home Secretary is demonstrating that responsible budgets and reform can deliver better services for the public. In 2015, she will work with a resource budget of £9.9 billion, which is a saving of 6%, but the police budget will be cut by less than that. There will be further savings in the central department, police forces will be encouraged to share services and some visa fees will go up, but protecting Britain from the terrorist threat remains a top priority, so I can confirm that the police counterterrorism budget will not be cut at all.
	For the police to do their job, they need a criminal justice system that works a lot better. A case of common assault can take 240 days to pass through the courts and involves five separate sets of case papers generated on three different computer systems. In some prisons, the cost of keeping a prisoner is £40,000 a year, but in others, it is one third of that, while the cost of legal aid per head is double the European average. My right honourable friend the Lord Chancellor is reforming all these things, and by doing so will make savings of 10% in his departmental budget—and he will do that while for the first time offering probation services for those who have served short sentences to help to end the revolving door of crime and reoffending.
	That is an example of the reform we are bringing in across Government, and every step of the way, every penny saved, every programme reformed, every entitlement reduced, every difficult choice taken, has been opposed by vested interests and those who got Britain into this mess in the first place. We will not let up. I will not let that happen. The reform will continue.
	Government spending does not alone create sustainable growth; enterprise does, and the job of the state is to provide the schools, science, transport links and reliable energy that enable business to grow. Britain was once the place where the future was invented, from the railway to jet engine to the world wide web. We can be that country again, and today we set out how to get there. A huge amount of innovation and discovery still goes on, but successive Governments, of all colours, have put short-term pressures over long-term needs and refused to commit to capital spending plans that match the horizons of a modern economy. Today we change that. We commit now to £50 billion of capital investment in 2015. From roads to railways, bridges to broadband, science to schools, it will amount to more than £300 billion of capital spending guaranteed to the end of this decade.
	Today, we raise our national game. That means that Britain will spend on average more as a percentage of its national income on capital investment in this decade, despite the fact that money is tight, than in the previous decade, when government spending was being wasted in industrial quantities.
	My right honourable friend the Chief Secretary to the Treasury will tomorrow set out the next stage of our economic infrastructure plan, with specific plans for more than £100 billion of infrastructure projects. Here is what that will mean for the departments. The Department for Transport will make a 9% saving in its day-to-day resource spending, bearing down on the running costs of Transport for London and on rail administration, but its capital budget will rise to £9.5 billion —the largest rise of any part of Government—and we will repeat that commitment for every year to 2020.
	We are already massively expanding investment on major road schemes, but we will do more. We are announcing the largest programme of investment in our roads for half a century. We have already expanded our investment in the railways, but we will do more. We are committing to the largest investment in our railways since the Victorian age, and with the legislation before this House today, we should give the green light
	to HS2, which will provide a huge boost to the north of England and a transformation of the economic geography of this country.
	Here in London, we are digging Crossrail, the largest urban infrastructure project in Europe, but we will do more. We are looking now at the case for Crossrail 2, linking London from north to south. We are going to give the mayor almost £9 billion pounds of capital spending and additional financing power to the end of this decade.
	Investing in our economic infrastructure also means investing in energy, so we will provide the certainty that investors are crying out for in western countries. This country is already spending more on renewables than ever before. Now we will provide future strike prices for low carbon. We are restarting our civil nuclear programme when other countries are unable to continue theirs, and now we are providing guarantees for new nuclear. Our exploitation of gas in the North Sea is already second to none. Now we are making the tax and planning changes that will put Britain at the forefront of exploiting shale gas. We will provide our country with the energy of the future at a price that we can afford. Taken together, this should support over £100 billion of private sector investment in energy.
	The Department of Energy and Climate Change will do this while reducing its resource budget by 8%. The Department for Environment, Food and Rural Affairs will see a 10% reduction, but we will set out plans for a major commitment to new flood defences for the rest of this decade. Again, we are prioritising long-term capital through day-to-day cost savings, which is exactly the tough choice that Britain should be making.
	It is not enough to have roads, power stations and flood defences. That is just the physical infrastructure we need to compete in the 21st century. We need the intellectual capital, too. This country needs to invent, pioneer and export around the world. That means backing the Department for Business, Innovation and Skills, which helps us to do that. And it means taking tough decisions about what we should support. My right honourable friend the Secretary of State for Business, Innovation and Skills has agreed to a reduction of 6% in the cost of the department. That means that we are making savings to student maintenance, keeping grants but not increasing them, and the cost of the central department will also be cut further. That means that, within the reduced budget, we can put more money into apprenticeships and continue with the dramatic increase in support that we have provided to exporters through UK Trade & Investment.
	We are not going to shift medical training and research out of that department, because they are working well where they are. And in that department too, we can shift from day-to-day spending to a huge 9% increase in capital investment. That includes a huge investment in science. Scientific discovery is first and foremost an expression of the relentless human search to know more about our world, but it is also an enormous strength for a modern economy. From synthetic biology to graphene, Britain is very good at it and we are going to keep it that way. Today, I am committing to maintaining the resource budget for science at
	£4.6 billion, to increasing the capital budget for science in real terms to £1.1 billion, and to maintaining that real increase to the end of this decade. Investment in science is an investment in our future. So yes, from the next generation of jet engines to cutting-edge supercomputers, we say: keep inventing, keep delivering; this country will back you all the way.
	We have infrastructure and we have science, but we still need an educated work force to make it happen. Because of our ongoing reforms to our universities, they are now better funded than before. People will remember that the reforms to higher education were bitterly contested in the House. We remember the scaremongering about fees, and the claims that they would destroy social mobility and put off students from poorer communities applying. And what has happened since? We now have the highest ever proportion of students from the most deprived neighbourhoods applying to universities. We should all welcome that.
	There is no greater long-term investment a country can make than in the education and skills of its children. Because of the tough decisions that we have taken elsewhere, we have been able to invest in education and accelerate school reform. When we took office, our country’s education system was falling behind other parts of the world. Now, thanks to the brilliant programme of reform by my right honourable friend the Secretary of State for Education and the Minister for Schools, my right honourable friend the Member for Yeovil, we are once again leading the way.
	We have applied our reform principles in education too, freeing schools and teachers to concentrate on teaching and turning the majority of secondary schools into academies. In this spending round, that momentum of reform will grow. The Department for Education’s overall budget will increase to £53 billion and schools spending will be protected in real terms, fulfilling the pledge we made at the beginning of this Parliament, for all of this Parliament. We will transfer power and money from town halls and central bureaucracy to schools, so that more of the money for education is spent on education. So, while grants to councils and spending on central agencies are reduced, the cash going to schools will go up.
	I can announce today that schools spending will be allocated in a fairer way than ever before. School funding across the country is not equally distributed; it is distributed on a historical basis with no logical reason. The result is that some schools get much more than others in the same circumstances. That is unfair and we are going to put it right. Many MPs on both sides of the House have campaigned for that. My honourable friend the Member for Worcester has been a particular champion in this Parliament. Now, the lowest-funded local authorities in this country will at last receive an increase in their per-pupil funding as we introduce a national funding formula to ensure that no child in any part of our country is discriminated against. We will consult on all the details so that we get this historic reform right. The pupil premium that we have introduced also ensures that we are fair to children from low income backgrounds. It will be protected in real terms, so that every poor child will have more
	cash spent on their future than ever before. The capital budget will be set at £4.6 billion in 2015-16, with over £21 billion of investment over the next Parliament.
	We will also tackle the backlog of maintenance in existing schools and we will invest in new school places. We will fund 20 new studio schools as well as 20 new university technical colleges, as they are outstanding new vocational institutions. Free schools are giving parents the opportunity to aspire to a better education for their children. The Opposition have said that they want no more of them, but we will not allow such an attack on aspiration to happen. Instead, we must accelerate the programme and bring more hope to more children. That is why I can announce that we will fund an unprecedented increase in the number of free schools. We will provide for 180 great new free schools in 2015-16.
	The schools budget will be protected, there will be fairer funding across the nation, the pupil premium will be extended to more students than ever before and there will be a transformation in the free school programme. We will not make our children pay for the mistakes of the past. We will give them every chance for the future, because that is the single best investment we can make for Britain.
	Our education settlement is also consistent with the third and final principle of this spending round—fairness. It is not possible to reduce a deficit of this size without asking all sections of the population to play their part, but those with the broadest shoulders should bear the greatest burden. The Treasury’s distributional analysis shows that the top fifth of the population lose the most after this spending round, and the independent Institute for Fiscal Studies is unequivocal that the richest 10% have paid the most. In every year of this Parliament, the rich will pay a greater proportion of income tax revenues than they did in any one of 13 years under the last Labour Government.
	When it comes to Her Majesty’s Revenue and Customs, despite the fact that this department will see a 5% reduction in its resource budget, we are committed to extra resources to tackle tax evasion. The result is that we expect to raise over £1 billion more in tax revenues from those who try and avoid paying their fair share.
	Fairness also means refusing to balance the budget on the backs of the world’s poorest. I know that not everyone believes we should fulfil our commitment to spend 0.7% of our national income on development—but I do. I am proud to support a Government who are the first in our history to meet our pledge and meet it not only this year, but next year and the year after that. Of course, overseas development is about more than just the Department for International Development budget, and we comply with internationally policed rules. The DfID budget is, however, the lion’s share, and it will be set at £11.1 billion in 2015-16. Even in these tough times, the decisions we make mean we keep to our commitments.
	That includes our commitment to the National Health Service—an institution that is the very embodiment of fairness in our society. The NHS is much more than the Government’s priority; it is the people’s priority. When we came to office, the health budget was £96 billion; in 2015-16, it will be £110 billion—and capital spending
	will rise to £4.7 billion. New medical treatments and an ageing population mean that the demand for NHS services is rising, so we have not spared in also demanding reform and value for money in this service. This will not insulate the health service from tough choices; there are already 7,000 fewer managers, and the NHS will continue to make efficiency savings. Those savings will, however, enable new investment in mental health and funding for new treatments for cancers such as prostate and breast cancer. Let me respond directly to the breast cancer research campaign in which so many have taken part. We will continue to back the charity research support fund and look into making it easier for these organisations to benefit from gift aid.
	Many older people do not just use the NHS; they also use the social care system. If we are honest, they often fall between the cracks of the two systems, being pushed from pillar to post, not getting the care they should. None of us here would want that for our parents or grandparents, and in a compassionate society, no one should endure it. It is a failure that also costs us billions of pounds: Britain can do better.
	We said in the 2010 spending review that the NHS would make available around £1 billion a year to support the health needs of people in social care. It worked, and saved hundreds of millions in the process. Last year, these improvements meant almost 50,000 fewer bed days were lost to the NHS. So today, I can announce that I will bring together a significant chunk of the health and social care budgets. I want to make sure that everyone gets a properly joined-up service where they will not have to worry about whether a service is coming from the NHS or the local council.
	Let us stop the tragedy of people being dropped in A&E on a Friday night to spend the weekend in hospital because we cannot look after them properly in social care. By 2015-16, over £3 billion will be spent on services that are commissioned jointly and seamlessly by the local NHS and local councils working together. It is a huge and historic commitment of resources to social care, tied to real reform on the ground, to help end the scandal of older people trapped in hospitals because they cannot get a social care bed. This will help relieve pressures on A&E, help local government to deliver on its obligations and will save the NHS at least £1 billion. This is integrated health and social care—no longer a vague aspiration, but a concrete reality transforming the way we look after people who need our care most.
	So these are the three principles that guide the spending round: reform, growth and fairness. Nowhere could these principles be more clearly applied than in our approach to welfare. Two groups of people need to be satisfied with our welfare system: those who need it who are old, vulnerable, disabled or have lost their job, whom we as a compassionate society want to support. Then there is a second group: the people who pay for this welfare system who go out to work, pay their taxes and expect it to be fair on them, too.
	So we have taken huge steps to reform welfare: changing working age benefits with universal credit so that work always pays; removing child benefit from the better off; capping benefits so that no family out of work gets more than the average family gets in work.
	And we have been making sure that benefit payments do not rise faster than wages. The steps we have taken will save £18 billion a year—and every single one of them was opposed by the welfare party on the Opposition Benches.
	Now we propose to do three further welfare reforms. First, as I said in the Budget, we are going to introduce a new welfare cap to control the overall costs of the benefits bill. We have already capped the benefits of individuals, and now we cap the system as a whole. Under the system we inherited, welfare spending was put into a category called annually managed expenditure, but the problem was that it was not managed at all. The cost of welfare went up by a staggering 50%—even before the crash. Our welfare cap will stop that happening again. The cap will be set each year at the Budget for four years. It will apply from April 2015 and will reflect forecast inflation, but it will be set in cash terms. In future, when a Government look to breach the cap because they are failing to control welfare, the Office for Budget Responsibility will issue a public warning. The Government will then be forced to take action to cut welfare costs or publicly breach the cap and explain it to Parliament.
	We will exclude a small number of the most cyclical benefits that directly rise and fall with the unemployment rate to preserve the automatic stabilisers: housing benefit, tax credits, disability benefits and pensioner benefits will all be included—but the state pension will not. I have had representations that we should include the basic state pension in the welfare cap. That would mean that a future Government could offset a rise in working age benefits by cutting the pensions of older people. That penalises those who have worked hard all their lives. Cutting pensions to pay for working age benefits is a choice this Government are certainly not prepared to make. It is unfair; we will not do it and we reject those representations completely.
	The new welfare cap is proof that Britain is serious about living within its means: controlling spending, protecting the taxpayer and being fundamentally fair. Today we are introducing a limit on the nation’s credit card. The principles enshrined in the cap apply to our second reform today. We will act to ensure that we stop the cost of paying the winter fuel payments made to those who live abroad from rising in a way that no one ever intended. EU law now says that people living in the European Economic Area can claim winter fuel payments from us, even if they did not get them before they left the UK. Paying out even more money to people from all nationalities who might have worked in this country years ago, but no longer live here is not a fair use of the nation’s cash. So from the autumn of 2015, we will link the winter fuel payment to a temperature test; people in hot countries will no longer get it. It is, after all, a payment for winter fuel.
	The third welfare reform I announce today is about making sure we do everything to help people get into work. My right honourable friend the Secretary of State for Work and Pensions has changed the national debate about welfare, and has comprehensively won the argument. He has committed himself to finding a further 9.5% of savings in his department’s running
	costs. That will require a difficult drive for efficiency, and a hard-headed assessment of underperforming programmes.
	However, welfare reform is about much more than saving money, vital though that is. It is about reducing dependency and changing people’s lives for the better. I am determined to go further to reduce worklessness with all its social consequences. Where is the fairness in condemning people to a life on benefits because the system will not help them to get back into work?
	Today we are introducing Upfront Work Search. We are going to make sure that people turn up with a CV, register for online job search, and start looking for work. Only then will they receive their benefits. Thanks to this Government, lone parents who are out of work can now receive free childcare for all their three and four-year-olds, so it is reasonable to ask that they start regularly attending jobcentres and preparing to return to work.
	We are announcing further changes today. Half all jobseekers need more help with looking for work, so we will require them to go to the jobcentre every week rather than once a fortnight. We will give people more time with jobcentre advisers, and proper progress reviews every three months. We will also introduce a new seven-day wait before people can claim their benefits. Those first few days should be spent looking for work, not looking to sign on. We are doing those things because we know that they help people to stay off benefits, and help those who are on benefits to get back into work faster.
	Here is a further change. From now on, if claimants do not speak English, they will have to attend language courses until they do. That is a reasonable requirement in this country. It will help people to find work, but if they are not prepared to learn English, their benefits will be cut.
	As a whole, this new contract with people on benefits will save more than £350 million a year, and all that money will enable us to afford extra support to help people to get into work. Help to work, incentives to work, and an expectation that people should do everything that they can to find work: that is fair to people who are out of work, and it is fair to those in work who pay for them. Together, these reforms bring the total additional welfare savings in 2015 up to £4 billion.
	Step by step, this reforming Government are making sure that Britain lives within its means. The decisions that we make today are not easy, and these are difficult times; but with this Statement, we make more progress towards an economy that prospers, a state that we can afford, a deficit coming down, and a Britain on the rise. I commend this economic plan to the country”.

Lord Davies of Oldham: My Lords, as the Minister indicated, we are considering a spending review that the Chancellor of the Exchequer said represents reform, growth and fairness, but there is little in the Statement to back up any of those assertions. In fact, the real reason we are here today is because of this Government’s economic failure. They have been forced back, begging for more: more cuts to the police, more cuts in the
	defence budget and more cuts to local services. This Government have failed on living standards, growth and the deficit, and families and businesses are paying the price. We have been told—in fact, it has even been boasted by the Government—that there was no intention for it to turn out like this. The Chancellor told the other place in his first Budget in the halcyon days of 2010 that the economy would grow by 6%, but in fact the economy has grown by 1%.
	The Government pledged to get the banks lending, but at this stage lending is still down, month by month. There has been no reform of the banking industry, and competition and lending to individuals and small and medium-sized enterprises has gone backwards. The Government made keeping the AAA credit rating the No. 1 test of their economic credibility. However, on its watch Britain has been downgraded not once but twice. The Government promised that living standards would rise, but they have fallen year on year. They said that they would balance the books, but the end to austerity is being pushed further and further into the future, way beyond the next general election, which of course was their original target date. This is all because of failure. What a legacy to leave. What a straitened inheritance for the next Labour Government to sort out—and we will sort it out, in a fairer way.
	Plan A has failed. The need for this Statement today could not demonstrate that more clearly. However, where is the change of course? Where is the plan for growth and jobs that we—and, of course, the International Monetary Fund—called for? It does not have to be this way. Instead of planning cuts in 2015, two years ahead, surely the Government should be taking bold action now to boost growth this year and the next—investment that would get our economy going and bring in the tax revenue to get the deficit down. More revenue would mean that our police, Armed Forces and public services would not face cuts. Housebuilding is at the lowest level since the 1920s, so where do the Government plan to build 400,000 affordable homes this year and the next? There is no point in the Government boasting about infrastructure investment in five or seven years’ time when we need action now.
	What a boast that is. The Green Book reveals that capital expenditure by departments will actually be cut. So much for the Prime Minister’s assurances at this morning’s Question Time that a great deal of progress is being made in this area. Year on year, real departmental capital budgets have been cut. Where do we see these figures? The book shows, in black and white, a 1.7% cut. If I am not believed, PricewaterhouseCoopers surely will be, because it said the same thing. There is a pattern here. Investment has fallen in real terms under this Government. It fell an astonishing 50% in the first three months of this year. Projects such as Labour’s successful Building Schools for the Future programme have been cancelled, and developments promised by the Government have never materialised. Just seven projects have been completed and 80% of projects have not even been started.
	We need action now, not more empty promises for the years ahead. The Chancellor in his Statement insisted that we must plan for the long term, look to
	the future and secure a recovery for future generations. However, there is no substance to these statements. Where is the proper British investment bank that business clearly needs and wants? Where is the 2030 decarbonisation target to give energy companies the certainty they need to make their long-term investment for the future? Where is the backstop power to break up the banks, which the parliamentary commission called for? What happened to the plan of the noble Lord, Lord Heseltine, and its much-heralded £49 billion single-pot growth fund for the regions? A measly £2 billion is all that has been announced today.
	Instead of action to boost growth and long-term investment, all we have today is more of the same failing plan and more of the same on social security and welfare spending. We have had plenty of tough talk and divisive rhetoric, but on the Chancellor’s watch the benefits bill is still rising. Social security spending is £21 billion higher than he planned. This is because the Government have failed to get growth going and to get people back into work—work that pays decent wages and does not discriminate, work that holds a compulsory job guarantee, paid for by a tax on bank bonuses. We hear the call for a cap on social security spending. Will the Minister enlighten the House with a few more details on this and how it will be administered? Why not get our housing benefit bill down by tackling high rents and the shortage of affordable homes? Why not stop the winter fuel allowance for the richest 5% of pensioners, while keeping the triple lock for basic state pensions? Why not make work pay with a 10% tax rate paid for by a mansion tax, instead of huge tax cuts for millionaires?
	This Government are making the wrong choices on growth and social security spending—decisions that are unfair and do not reflect the sort of society we want to live in. The Government are also making the wrong choices on departmental spending. When thousands of front-line police officers are being cut, why are they spending more on police commissioners than on the old police authorities? Why have the Government wasted £3 billion on a reckless reorganisation of the NHS, when there is a crisis in our social care system that needs to be addressed, and which they are now somehow going to spatchcock by transferring resources? Why are they funding new free schools in areas with enough school places, while parents in other areas cannot get their children into a local school? Will this spending review mean fewer police officers in 2015-16, on top of the 15,000 we have lost in this Parliament? Will it mean fewer nurses on top of the 4,000 we have lost from the NHS? Will it mean fewer Sure Start children’s centres on top of the 500 that have already closed?
	It is clear that the Government will continue to impose deeper cuts on local authorities in areas with the greatest need. It is the areas with the greatest need that continue to suffer the deepest cuts. People up and down the country need to know about this Government’s real intentions. The Government have comprehensively failed on living standards, on growth and on the deficit. That is why the Chancellor was before the House of Commons earlier today. We see prices rising
	faster than wages, families worse off, long-term unemployment up, welfare spending soaring, the economy flatlining and the slowest recovery for a century. The result of this failure is not balancing the books as promised, but in 2015 a deficit of £96 billion. That is why there is a need for more borrowing to pay for the coalition’s economic failure. That is why the Government have been forced to make this Statement and impose these cuts on our public services.
	Two years ago, when the intake of breath was so severe at the cuts at that time, the Chancellor said that,
	“we have already asked the British people for what is needed, and … we do not need to ask for more”.—[ Official Report , Commons, 23/3/11; col. 951.]
	—another broken promise.

Lord Deighton: My Lords, I should like to put both the spending review and the comments of the noble Lord, Lord Davies, into context. He said a great deal about a failed economic strategy. We inherited one. Any of us who have worked with the management challenges of a significant budget would recognise that in 2010, when this Government came into power, spending was out of control. This spending round represents a continuing exercise in getting our public finances back into shape. This Government and the officials working in this area should absolutely be commended. They laid out a very clear plan in 2010 to deliver £80 billion of savings through to 2014-15. Sixty-five per cent of that—just over £50 billion—has already been delivered and the rest is on target. Therefore, the purpose of this spending round is to make a further £11.5 billion of savings, which have been thoughtfully and effectively made based on the criteria, as the noble Lord pointed out, of reform, growth and fairness. Within that £11.5 billion of savings, we have of course made some extremely tough choices. There are no easy choices in this current environment. We have protected the priorities that we promised and laid out at the election—those relating to health, schools and overseas aid.
	The principles underlying how we have dealt with each department have revolved around making sure that the departments work and operate on a highly efficient basis with the right number of people, with the right degree of automation, with the right degree of procurement, and with commercial skills being brought to the purchasing decisions they make so that we can get our costs down and operate efficiently. That is true right across the departments and it is where those savings have come from.
	I shall give an example of reform. Probably the most significant reform laid out in this programme is that we are establishing a new £3.8 billion health and social care pot to be shared between the National Health Service and local authorities to make sure that the services between hospital and the home are much better delivered and so that we can take care of people who need that help. We do not want the situation where somebody is delivered into a hospital bed on a Friday night because there is nowhere else for them to go and they are sent home again on a Monday because we cannot take care of them over the weekend. That is
	the kind of service reform that we have been talking about, and that has been the basis on which this £11.5 billion saving has been made.
	Where does that take us? It will mean that by 2015-16 we will be well down the path of taking public expenditure as a proportion of total expenditure back to a sensible level. It should be back to just over 43% from the 30-year high of 47% or 48% in 2009. By the end of our consolidation in 2017-18, it will be back to 40%. That is the repair that this Government have had to undertake because of the spending profligacy that took place under the previous regime.
	The deficit has fallen by a third as a percentage of GDP and is set to continue falling to below the pre-crisis level by the end of this Parliament. Most interestingly, the biggest saving that we have made is on our debt interest costs because we have got borrowing under control. Those costs are £9 billion lower than was forecast in the Budget of 2011. For me, that is probably the most telling statistic. Of course, we introduced savings on welfare bills through the Autumn Statement decisions.
	We have talked about the situation with respect to capital spend and perhaps I may exchange some statistics. Effectively, through each of the fiscal events, the Government have saved money on current spending and invested it in capital spending. That is how we have chosen to do it; we are not doing it by increasing borrowing, and that is absolutely the right strategy to pursue. The sum involved is £10 billion over this Parliament. Public investment will be higher on average over 2010-11 to 2014-15 than it was under the previous Government. We are investing more in roads than at any point under the previous Government—and that is now. We are building more school places than at any time under the previous Government, and next year we will be building more affordable houses than at any point in the past 20 years.
	There will be much more detail about this tomorrow, when the Chief Secretary comes out with details on the capital plan. Accompanying that will be a document called Investing in Britain’s Future, which will lay out how we will spend £100 billion on infrastructure investment over the next Parliament. We all want it to happen quicker. I am here today because the Chancellor and the Prime Minister wanted some help in making it happen quicker. We have an urgent and focused plan to deliver on that, and the Chief Secretary will lay it out in detail tomorrow.
	In summary, we currently have the largest investment in railways since the Victorian age. Crossrail, which is being dug at the moment, is the largest urban infrastructure project in Europe. In this spending round, we are funding the case for Crossrail 2, which would link London from north to south. We have given the mayor almost £9 billion of capital spending. We have completed Kings Cross station. We are funding science at higher levels than ever before, with a long-term commitment. We are developing our intellectual as well as our physical infrastructure.
	The noble Lord talked a little about where we were in delivering on the Government’s infrastructure programme. He said about 20% of it was under way.
	By next year, half will be under way. That is the whole point of a pipeline. The Government can really add value by getting through the difficult early stages of choosing the project, finding the funding and dealing with planning and environmental considerations. We are focused where we should be—dealing with ideas and getting them through to the “shovel in the ground” stage. That is really the hard bit in any project. It is right that the projects we are focused on are the ones that have not started yet. Our record in this country, once we start, for delivering things on time and on budget—I have been part of some of it—is extremely good.

Lord Forsyth of Drumlean: My Lords, can my noble friend confirm that at the end of the previous Government’s period of office the national debt had doubled, and that on the figures presented today the national debt will have doubled again by the time of the election? Can he explain what the effects would be of a rise in interest rates of, say, 1% on the repayments which the Government will have to make on their borrowings and on the value of the government gilts held by the Bank of England? How will that hole be dealt with? He mentioned that interest rates have been held down, but we are already seeing rates beginning to rise, so what contingency plans are in place? Should we not be very much more concerned about the future of the economy, given that the outgoing Governor of the Bank of England has today warned our youngsters about the possible impact on mortgages and on the balance sheets of the bank themselves? Where is the contingency planning for that eventuality in the Government’s Statement today?

Lord Deighton: I thank my noble friend for raising, as he has done on many occasions before, everyone’s awareness of the fact that when we discuss the deficit we are talking about the annual addition to our stock of borrowing. Until that deficit turns into a surplus we will not reduce our stock of borrowing, and the increased stock of borrowing leaves us with a significant exposure. My noble friend Lord Newby informs me that a 1% increase in interest rates will have an economic effect of approximately £4 billion, but we will review that number.
	The way to provide for the contingency to be able to cope with any additional expenditure, whether it is interest, overseas issues or events that crop up, is to continue to drive down our deficit to give us as much flexibility as possible to handle whatever events face us in the future.

Lord Wigley: My Lords, can the Minister address the question of fairness with regard to the devolved Administrations? Under the title of fairness, the Green Paper refers to the Barnett formula going on until the end of 2016 at least. Surely, as a committee reported to this House—the noble Lord, Lord Barnett, himself has been involved in this—whatever the situation is with regard to Scotland and Northern Ireland, the Barnett formula is patently unfair to Wales and is
	underfunding the Welsh Assembly for essential services. When are the Government going to get to grips with this?

Lord Deighton: We do not have any proposals to adjust the Barnett formula in this Parliament. As I understand it, the Welsh resource budget will be approximately £13.6 billion, and we will publish our response shortly to the Silk commission on the further devolution of taxation and borrowing.

Lord Myners: My Lords, the Minister has said a number of things that I think are significantly challengeable. First, his maths in response to the noble Lord, Lord Forsyth, are clearly substantially deficient and lead one to ask how much a Treasury Minister really knows about the state of government finances.
	Secondly, the Minister said that debt as a percentage of GDP will be below pre-crisis levels by the end of this Parliament. I would like to see the evidence on which the Minister makes that statement. Clearly, it is not consistent with the OBR’s forecast.
	My question, however, is about the relationship between monetary policy and fiscal policy. The Government have consistently talked about an accommodative monetary policy linked to a tighter fiscal policy. They now own £325 billion of their own debt through the QE programme. Why do they not simply cancel the debt that they have bought for fair value in the markets from banks and pension funds with the proceeds that they have in the QE portfolio on the asset purchase scheme?
	Why do the Government not recognise that they can manage a pretty low inflation risk through using sterilisation techniques in the money markets and adjusting reserve ratios, and acknowledge that, despite QE, monetary growth is not increasing and inflation risk is low? That would be a simple answer that would at a stroke reduce debt as a percentage of GDP by 30%.

Lord Deighton: The question of how we unwind QE is a matter for the Monetary Policy Committee. It is not for me to give advice here.

Baroness Kramer: My Lords, when it comes to not understanding, I have to say that from the conversations that I have had in the media today with members of the Labour Party and listening to today’s speech, I am unclear whether they want different cuts or more borrowing, but it seems to be one response or the other to this particular spending round. I am very pleased with many aspects of this spending round, particularly the emphasis now on future growth.
	Will the Minister confirm that the decision to put more money into schools, thereby protecting the schools budget as well as being a real-terms increase in the pupil premium, is because they have proven to be successful and effective programmes? On the infrastructure area, which is his area of specialty, will he assure me that although there is the Heseltine pot for local areas, the big national infrastructure expenditures will be
	co-ordinated with local activity so that we can maximise the opportunities that spin off from this very substantial increase in infrastructure?

Lord Deighton: I thank my noble friend for her observations about the education programme being a prime example of investing in the success of an effective programme. That is absolutely right. On the local pot and infrastructure spend, it is absolutely our intention to make sure that there is a strong relationship between the regional plans—ultimately, all infrastructure operates at a local level—and that we co-ordinate those at a national level to ensure that we get the maximum leverage from the money that we are spending at both ends.

Lord Martin of Springburn: My Lords, I noted when I listened to the Chancellor that he made a commitment to apprentice training. My thoughts go back to the 1980s when there were many closures, particularly in engineering. No one was taking on apprentices. Within 10 years, employers were calling out for trained journeymen. There were complaints sometimes that skilled labour had to come from abroad. I am on my feet today to say that I hope that the Chancellor and the Government keep their promise to take on apprentices. Not only does that help the apprentices, but it gives a great source of pride to the family when a young person is taken on for skilled work.

Lord Deighton: I thank the noble Lord for raising this important issue. It is the Government’s intention to implement the recommendations of the Richard review, which will see through the apprentice programme. It sits very neatly alongside the success that we have seen over the past four years, with the private sector picking up and generating employment to compensate for the small number of losses in the public sector. A strong apprentice programme sits very nicely with that.

Lord Morris of Aberavon: My Lords, will the Minister comment on whether the Government have fulfilled all their statutory obligations, in particular the Public Bodies Act 2011, in their spending review decisions?

Lord Deighton: My Lords, I am working on the assumption that we have fulfilled those, but I am sure somebody will tell me very quickly if we have not. It is not a stipulation I am familiar with.

Lord Higgins: My Lords, when the coalition was formed, I stressed that it would be far more difficult to reduce the deficit than was generally supposed. Having been involved in spending cuts in previous Governments, I would certainly not underestimate the task facing the Chancellor. None the less, there is a danger that we are underestimating what still needs to be done. The Government keep repeating the mantra, “Oh well, we have reduced the deficit by a third”. Actually, this means that we are borrowing more at two-thirds of the rate that we inherited from the previous Government.
	We are still living way beyond our means, in part because we are paying for Gordon Brown’s proposals, for which there was no money then and for which no money is available now, except by borrowing. Does my noble friend agree that we really have to press on with much more determination in tackling this whole issue and that it would be wrong to say that we are all right just because we reduced the deficit by a certain amount?

Lord Deighton: I agree with my noble friend that managing the public finances responsibly will be a continuing exercise of considerable discipline. On managing current spending, we have introduced the welfare cap on the overall budget as well as the cap on specific benefits that we saw in the previous Budget. Departmental budgets are being managed with discipline. There has also been a real focus on switching from current expenditure to capital expenditure, which should support the enhancement of the productive capacity of the economy and thus help us with tax revenues. Those components should continue to be an urgent and aggressive focus of the Government’s fiscal management.

Lord Christopher: Page 5 of the Printed Paper Office version of the speech says:
	“We will end automatic progression pay in the Civil Service by 2015-16”.
	That is a very serious breach of faith. Quite apart from anything else, how are the Government going to do it?

Lord Deighton: We are going to do it simply by implementing it in 2015-16. As I understand it, many of the structural changes to Civil Service pay have already been made in many departments. This is just equalising the system right across the service.

Lord Barnett: My Lords, I start by acknowledging the very difficult economic situation that every Government are going to face. People are living longer and I am the last person in the world to complain about that.
	Given that every forecast made by the Chancellor since 2010 has had to be adjusted, how do we know that we need exactly £11.5 billion of cuts in 2015? What was his economic forecast for that year? We now know that no economic forecast by anybody can be expected to be accurate, even if it is based on next year. Perhaps the Minister will tell us why we should assume, when every forecast that the Chancellor has previously made has been wrong, that a forecast based the economy in two years’ time will do precisely what he said. In one line, he says:
	“We commit now to £50 billion of capital investment in 2015”.
	That is rather a lot of money for one year. How long a period is that planned to be spent over? The cuts are going to take place after 2015. When will that £50 billion of capital expenditure be spent: this year, next year or only after 2015? We all know that we need it now. Why is he delaying it?

Lord Deighton: I absolutely share the noble Lord’s experience that economic forecasting is a hazardous art form. However, if done thoughtfully, it gives us the basis for creating a long-term plan against which we can make the best decisions possible, given the information we have. One of the things that I have been working on with the Chancellor is to take a longer-term perspective, particularly of our capital budget, and to have that budget as a foundation for our long-term fiscal management rather than being the bit that gets added on at the end. That is what results in the stop-go approach to investment which has plagued us for many years. For me, what it rather reflects is a shift in priorities to deal with the things for which you need to create a longer-term planning horizon, so that we can get the investment side of what we are doing sorted out over the right kind of horizon.

Lord Stoddart of Swindon: My Lords, to get back to a point raised by the noble Lord, Lord Forsyth, about quantitative easing, or the printing of money, there is of course the fact that the Government have saved £9 billion because of low interest charges. Those savings have been made at the expense of interest rates on savings, particularly those on pensions. Pensioners have been very badly hit because their expectations, and indeed their pensions, have been lowered for the future. Is it not a shame that some of the most vulnerable people in our society, such as the pensioners, have been made very much poorer in order to finance government spending, which is still far too high?

Lord Deighton: I of course accept that one of the consequences of lower interest rates is lower returns to savers. That absolutely follows on and it is a consequence in part of our current monetary policy, and indeed the monetary policy of every major nation. One compensating comment I would make is that of all the constituencies which this Government have striven to protect, looking at the triple-lock protection on pensions the basic state pension has clearly been kept in very good shape during this period of economic challenge.

Lord Marlesford: My Lords, the Chancellor said:
	“EU law now says that people living in the European economic area can claim winter fuel payments from us, even if they did not get them before they left the UK”.
	When on earth did that start and what are the Government doing to persuade the Europeans to change it? When the Chancellor suggests that he will deal with it by linking,
	“the winter fuel payment to a temperature test”,
	from 2015, what will that save? If it is worth doing it in 2015, why should he not do it in 2014, if not autumn 2013?

Lord Deighton: I thank my noble friend for pointing out this unfortunate anomaly in European legislation, which puts us in that position. The Chancellor’s position is that he has dealt with that anomaly in the best possible practical way to reduce that payment, given the timing of its introduction and the form of the obligation we have on us.

Lord Brooke of Alverthorpe: My Lords, the Chancellor said in his Statement:
	“The first line of national defence is sound public finances”.
	Following the theme of the noble Lord, Lord Higgins, why can the Chancellor then go on to boast that we have one of the largest defence budgets in the world? Here, I do not speak on behalf of my party but as an individual member of the community in this country. However, I suspect that I represent a fair point of view when we hear about the possible incursions into Syria and read of the Prime Minister saying that he is not prepared to see a reduction in Britain’s military capabilities. If we are to take truly tough decisions, is it not time that we really faced up to our position in the world—what we can do, what we cannot do and what we can afford?

Lord Deighton: That is a very broad question. In terms of the spending review, over time we have already taken some very difficult decisions with the Ministry of Defence. The focus of this particular spending round was to ensure that we put in place some economies in the support areas, but kept our front-line capability and made absolutely sure we had an equipment budget that could support our troops and the work that they were called on to do. That was the policy decision behind which the spending decisions fell into line.

Lord Cormack: My Lords, what is there in the Statement to boost our very important tourism industry? Cultural and heritage attractions, the things that tourists come to our country to enjoy, are going to suffer. What are we doing to boost tourism?

Lord Deighton: If noble Lords look across the contributions to the spending reduction, it is evident that the Department for Culture, Media and Sport, which oversees tourism, had one of the milder settlements, with cuts of something like 7%. In addition, museums in particular have been given some flexibilities in how they manage their finances and organise themselves, in order to help them cope with any changes in their grants. That is the sum total of specific points with respect to tourism.

The Economic Implications for the United Kingdom of Scottish Independence

The Economic Implications for the United Kingdom of Scottish Independence

Motion to Take Note

Moved by Lord MacGregor of Pulham Market
	That this House takes note of the Report of the Economic Affairs Committee on The Economic Implications for the United Kingdom of Scottish Independence (2nd Report, Session 2012–13, HL Paper 152).

Lord MacGregor of Pulham Market: My Lords, we launched our inquiry in February 2012, when it seemed likely that there would be a referendum on independence in Scotland in autumn 2014. Since then this has, of course, been confirmed. We did so because we were concerned that, on what was widely recognised as an
	issue of momentous consequences not only for the people of Scotland but for the rest of the UK, it was vital that such a vote should be based not only on sentiment and patriotic fervour but on a full understanding of all the implications. At that time, these consequences had simply not been fully analysed, let alone widely exposed to public debate. We did not make the case for or against independence. We did not go into the constitutional or legal issues on the referendum process. We focused entirely on the economic implications, primarily for Scotland, but which are just as important for the rest of the UK as well.
	The need for a properly informed debate before the referendum seemed to us to be all the greater as it became clear that if there were a yes vote for independence, it would probably take years to separate the Scottish economy from the rest of the UK and for it to negotiate entry into the EU as a new state. This would cause great economic uncertainty and possibly damage to Scottish businesses in the mean time. In our view, all the key issues and consequences needed to be fully explored beforehand, and not left to negotiations afterwards.
	We heard from 44 witnesses in all, including British and Scottish Ministers, academics, trade unions and local authorities, with a wide range of opinions on business, finance and politics. We heard evidence in Glasgow and Edinburgh, a first for the committee. One disappointment was that some Scottish companies from which we would have liked to have taken evidence declined to do so. One witness described there being a possible “climate of fear”, with witnesses having fears about the impact on their business of speaking out. Another disappointment was the First Minister’s declining to give evidence himself before the Committee, much as we pressed him to do so.
	I would like to stress yet again that our report is based on the evidence that we received. I thank all our witnesses, and on behalf of the committee express especially warm thanks to our specialist adviser, Dr Angus Armstrong of the National Institute of Economic and Social Research, for his most helpful contribution to our deliberations. As always I thank Bill Sinton, clerk to the committee, and his staff, for the huge amount of work they undertook. I am also most grateful to all my colleagues, who gave a great deal of their time to this inquiry and contributed greatly to the lengthy discussion that we had on the final report.
	As our inquiry progressed, it helped to shine increasing light on the economic implications of a yes vote and what they might entail. As we reached the drafting stage of our report, the British and Scottish Governments have each started to publish their own analyses of the various economic implications, which we warmly welcome. Much more needs to be done, however, if the Scottish voters are to make a fully informed choice in October 2014, and the wider British public—and I do mean the wider British public—are to understand the implications for them. As the UK Government say in their response to our report:
	“It is crucial that the referendum debate is properly informed”.
	I turn to some of the main issues and, given the time available, can only highlight the key ones. Some are already much clearer than when we embarked on
	our report. For example, it became apparent during our inquiry, not least because of the exchanges that we had with the President of EU Commission, President Barroso, and then of the UK Government’s own analysis, that in the event of a yes vote Scotland would become an entirely new state and that the continuing UK would retain the rights and obligations of the UK as it currently stands. This is important particularly in the context of the EU, but, for Scotland, it would also apply to many other international bodies and treaties. Indeed, it was during our visit to Scotland that the Scottish Government’s claim to have legal advice to the contrary was blown apart.
	Given the complexities in particular of negotiations with the EU and the need for unanimity of all member states in the EU in accepting a new member, it must be extremely unlikely that these negotiations would be completed by the spring of 2016, as some hope, and there is no certainty of outcome. Meanwhile, there would among other things be great uncertainty for Scottish companies operating internationally, for inward investment to Scotland and for other sectors of the Scottish economy.
	One particular impact is on international trade. Most of our business witnesses spoke of the importance of being within the EU. One particular advantage was stressed by some chief executives of Scottish-based international companies, who spoke of the benefits of international trading deals done by the EU for their companies. The significance of this is underlined by the launch of the negotiations for an EU-US trade agreement at the recent G8 summit.
	I turn next to currency choices. Our analysis is very similar to that of the UK Government. After some toing and froing, the Scottish Government seem to have settled for continuing to use sterling in a sterling currency union. The UK Government state in their Scotland Analysis document:
	“A formal … currency union is very different to the current arrangements and would be a profound economic change for both states … the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”.
	We in our report are even more specific, as we state:
	“A monetary union as advocated by the Scottish Government would require robust and credible limits on borrowing and indebtedness by both member states. So far the Eurozone has found this problem intractable”—
	a point acknowledged also by the UK Government in their document. We continue:
	“We believe that it would be difficult for any such agreements to made binding in all circumstances”.
	On Bank of England and monetary policy, again our report and the Government’s analysis are similar. The Government’s conclusion is that,
	“the economic rationale for the UK to agree to enter a formal sterling union with a separate state is not clear”,
	and that it is likely that economic and fiscal plans of a separate Scottish state would be subject to rigorous oversight by continuing UK authorities. We agree with that but are rather more direct. We do not see how the UK Government could extend central banking services to an independent Scotland, since the UK Government would lack control over its tax and spending policies. Crucially, we argued that this, along with the continued use of sterling by an independent Scotland in monetary
	union with the rest of the UK, could only come about, if at all, on terms agreed by the UK Government and that—a point to which I will return—arrangements should be clear before the referendum. We add that,
	“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.
	I note that in his letter to me, the Chief Secretary to the Treasury quotes the Chancellor of the Exchequer as saying that,
	“it is highly unlikely that the rest of the UK would agree to enter into a formal sterling currency union with an independent Scotland”.
	We entirely agree with that and believe that it should be confirmed before the referendum.
	I turn now to the other paper that the UK Government have so far produced, published last month, on financial services and banking. Time prevents me from going into detail—others may wish to do so—but, again, we are in broad agreement. We agree on the significance of Scotland’s financial sector to its economy and the fact that 90% of its customers are located in the rest of the UK; on the need for a separate Scottish financial regulator for an independent Scotland, adding to compliance costs and complexity for Scottish financial institutions; and on the fact that the assets of the whole UK banking sector, including Scotland’s banks, are around 492% of total UK GDP whereas, by contrast, Scottish banks would have assets totalling around 1,254% of an independent Scotland’s GDP, with all the implications for financial shocks such as we have experienced in recent years.
	All of these are key considerations for the Scottish electorate. As the Chief Secretary points out, that proportion of GDP is massively greater than was the case with Iceland, Ireland and Cyprus. The problems that would face Scottish banks, savers and depositors in the event of a financial crisis in an independent Scotland could be immense and need to be thought through in advance. We await government papers on assets and liabilities in defence, all of which are substantially covered in our report.
	On North Sea oil and gas, there is a broad equivalence between Scotland’s gain on North Sea oil revenues and what it would lose from abolition of the Barnett formula. I notice that the noble Lord, Lord Barnett, is in his place, and this is interesting for many of us in your Lordships’ House who have been arguing, one way or another, that the Barnett formula needs to be resolved in the near future. An independent Scotland, curiously, would resolve the question, although we would still have to worry about it if the independent vote did not say yes. However, that is not an answer to the Scottish issues. One of our witnesses, Professor McCrone, said that, on the expected geographical division, which we in our committee accept, about 90% of revenues would accrue to an independent Scotland. On the other hand, there is substantial volatility in oil prices, uncertainty over future oil revenues and the need to deal with substantial North Sea oil decommissioning costs. It is no long-term panacea.
	Division of assets and liabilities will be complex, including for PFI and public sector pensions. Indeed, the subject of pensions as a whole needs detailed consideration, including the need for a Scottish pension
	regulator for private sector pensions, a pension protection fund and a separate financial services compensation scheme for Scottish financial institutions. An independent Scotland will need to handle the difficult questions of the ensuing public sector debate as a consequence of looking at the division of assets and liabilities, with volatile tax revenue, the loss of risk-sharing with the rest of the UK and no record of issuing debt to global lenders. Those are all issues that the Scottish Government will need to spell out for the comfort of the Scottish electorate before the referendum.
	I turn next to defence, which is an absolutely key issue, particularly for the rest of the UK. We were disappointed that Defence Ministers refused to give evidence to us and we had to rely on others. We are particularly grateful to the noble Lord, Lord West, who gave some very compelling evidence to our committee. The UK Government’s position is that it is for the Scottish Government to set out for the Scottish people how the defence of an independent Scotland would be arranged and, for the rest of the UK, the UK Government cannot prenegotiate the deals of independence ahead of the referendum. We certainly recognise the security aspects and are clear that any post-referendum negotiation would be huge, lengthy and complex on defence issues. We are also clear that the defence implications, not least cost, are immense for the rest of the UK, and we hope that substantial contingency planning is already under way in the Ministry of Defence. Others may wish to comment on defence in greater detail today. I certainly welcome the fact that the Government are planning a detailed paper on shared defence and security services, and I hope that it will cover the issues that we have raised, on which we have so far not had a proper government response.
	This leads me to my final point. There is general agreement that this will be a momentous decision for the people of Scotland, but it is not so well recognised that this will also be a momentous decision for the rest of the UK. There are huge implications for the rest of the UK—over 90% of those affected.

Lord Steel of Aikwood: This excellent report is full of questions, some of which are directed to the UK Government—but mainly they are directed to the Scottish Government. As they have known for two years that they will have a referendum, does not the noble Lord find it extraordinary that these questions have not yet been approached?

Lord MacGregor of Pulham Market: I cannot speak for my committee as a whole—although I suspect I am doing so—but that exact point occurred to us as we went through all the evidence. Many of the responses that we were getting, or not getting, did not deal with the points that I am raising now. I put my emphasis on the UK Government’s position today because we are in the UK Government’s Parliament, but I hope that many of the issues that we have raised—and, incidentally, that have been raised by Scottish business and some Scottish local authorities, such as the Glasgow City Council—will get a better answer than we have had so far.
	As I was saying, we have spelt out many of the consequences of Scottish independence in our report. On defence in particular, there are potentially huge cost implications. Also included are such major issues as the division of assets and liabilities, negotiations on sterling and monetary policy, and so on. That is all very well. On the other hand, so much hinges on the subsequent negotiations. It is not enough, it seems to us, to leave it to those advocating independence to make the case, as the Chief Secretary to the Treasury has argued. He argued the case on our questions on the need to have the negotiations clarified as follows:
	“The UK Government believes that people in Scotland will vote to remain part of the United Kingdom and therefore is not making plans for Scottish separation from the UK. This is not complacency but rather based on a strong belief that the UK works, and works well. Scotland contributes to, and benefits from being part of the UK”.
	He goes on to say:
	“It is for those advocating independence to set out a clear and well evidenced case to people in Scotland about what the implications of leaving the UK would mean for them—including some of the unavoidable choices that will have to be made”.
	We do not think that that is a sufficient response because, in fact, the implications for the rest of the UK are very substantial as well. That is why we have argued the particular point that I stress now. We have argued in our report that:
	“Scotland needs and deserves a fully informed debate, based on fact and free from rancour, well before the referendum vote”.
	It continues with the following key point:
	“To help bring it about the Scottish and British Governments should be more open about how they see the outcome of negotiations after a ‘Yes’ vote; each should indicate the ‘red lines’ of its negotiating stance on such crucial issues as currency, defence, division of assets and debts and negotiations with the EU before the referendum so that voters can make an informed choice”.
	I regard this as a critical point. The debate is becoming much clearer and better informed, particularly since we took evidence and completed our report. The UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. However, there is still this issue about not discussing the negotiations in advance of the referendum. One argument has been that that should wait until after the negotiations, but one problem is that could make it very easy for many of the people intending to vote in the referendum to vote “yes”, on the assumption that all the negotiations would take place afterwards and that there would then be a second vote afterwards, once they were completed. That is not satisfactory and it is not the way it should operate. That is why we have urged—

Lord Forsyth of Drumlean: I am most grateful to my noble friend. Does he not think that the Government are facing two ways on these issues of referenda? On the one hand, on Scotland they say that we should have the referendum and then look at the detail afterwards, whereas on Europe the argument is that we must have the negotiations first so people know what they are voting for.

Lord MacGregor of Pulham Market: Well, yes. That is exactly why we must be much clearer about the negotiations before the vote takes place. I have explained the UK Government’s position on this and we do not think that that is sufficient. That is why we made the
	recommendation for the red lines to be clearly established beforehand so that no one is in any doubt as to where both Governments, but particularly the UK Government, would stand firm on some key issues.
	To conclude, since we took evidence and completed our report, the UK Government have produced very helpful and detailed analyses of some key issues and we look forward to more. But it is critical that they also address this issue of the red lines and they should undertake to do so well before the referendum. That is the upshot of our report. There is some very helpful analysis in it and it will continue to stand the test of time as we get towards the end of the negotiations. It is on the point of the red lines, which the Government in their response to our report have so far sidestepped, that I would particularly welcome the views of the noble and learned Lord on the Front Bench in the wind-up. I commend the report to the House.

Lord Kerr of Kinlochard: Had I managed to ask the noble Lord before he sat down, I would have asked—

Lord Gardiner of Kimble: The noble Lord may ask him at the end.

Lord McFall of Alcluith: My Lords, it is a pleasure to follow the noble Lord, Lord MacGregor, in this debate. I am open to intervention if need be on that issue. I thank him for his chairmanship. Allied to the question asked by the noble Lord, Lord Steel, the committee deliberately visited both Edinburgh and Glasgow, and spoke to the leaders of every party, including the former Chancellor, to the leader of Glasgow City Council and to business people. The only person missing was the First Minister. He would not come along to engage in the debate. That was an omission from the Scottish Government on this very important issue.
	The debate in Scotland will centre around two themes: identity and economics. On the issue of identity, there is an assumption that if one feels intensely Scottish one will vote for independence. The paradox is that the debate in Scotland will not be about how Scottish one feels but how British the people of Scotland still regard themselves. That is according to the Scottish Social Attitudes survey. So it is about the degree to which people in Scotland still share some sense of fellow-feeling with those living elsewhere in the United Kingdom. That will be central to the choice that is made. It is important that we highlight that in the debate in this Chamber today. It will come down to whether Scots feel that they can assert their Scottishness by parting with the unionist part of their soul.
	Michael Ignatieff, the UK journalist and leader of the Liberal Party in Canada, has a number of cautionary words for us in that area, because he took part in a referendum in Quebec. He said:
	“We learnt the strongest argument for leaving countries as they are turns out to be that most people don’t want to choose between different parts of their identity”.
	He added that post-referendum in Canada,
	“Canadians were able to joke that what Quebeckers really wanted was an independent Quebec inside a united Canada. I suspect a majority of Scots want something similar”.
	I was interested to see the Early Day Motion put down in the House of Commons on Dundee’s bid to become the UK City of Culture in 2017. It stated:
	“That this House welcomes the decision of Dundee City Council to bid to become UK City of Culture in 2017… and wishes the city of Dundee every success in its bid to become UK City of Culture in 2017”.
	It was signed by two prominent SNP Members of the House of Commons. Maybe there was an element of identity confusion there, along with the rest of the Scots.
	The conclusion on identity is that both sides need to engage. If this is about a sense of Britishness, we cannot stand back; there has to be full engagement. The letter to which the noble Lord referred was from the Chief Secretary to the Treasury on 10 June. I commend every noble Lord to read paragraph 9 of that letter, because more pressure needs to be put on the British Government. Otherwise they will seem to be complacent, since the evidence shows that we must demonstrate that sense of Britishness.
	What has characterised the debate in Scotland and elsewhere to date is the lack of good information. That is why it was wise of the Economic Affairs Committee, under the chairmanship of the noble Lord, Lord MacGregor, to start this debate. At the beginning, there was a sparsity of information, indeed a reluctance to talk, on the part of business. Rupert Soames, the chief executive of Aggreko, which was based in my former constituency and started life as a very small company—a two-man business—and is now a FTSE 100 company, built his new headquarters in Dumbarton. It was the last thing he did before I stood down from the House of Commons. He told the Committee that if business opens its mouth, “bile and ire” rains down on people, the language is intemperate and business people feel that there are better things to do than be hauled over the coals.
	The situation is now changing, and one thing that we have to remember is that the tone of the debate will matter greatly. Michael Ignatieff said that the referendum in Quebec produced fracture and division. We want to minimise that, because we have to live with each other after this referendum. That tone is still very important, but the uncertainty remains and I am glad to see that the CBI, the Scottish Council for Development and Industry and universities have been participating in this debate in asking the question.
	Along with lots of others, I have no doubt that if Scotland decides to become a politically independent nation, it can do that, but the crucial question is how much economic independence Scotland will achieve. Jim Sillars, a former leader of the SNP, says, “Not very much”. That is why he rejects the proposals by the present SNP Government. Professor Gavin McCrone, a most esteemed economist for the Scottish Government over the years, has said that currency choice is the most important economic decision that Scotland will make.
	Over the past 25 years, the Scottish National Party has adopted the stance of supporting an independent Scottish pound, then the euro and now the pound
	sterling, but the First Minister is on record as saying that the pound is a millstone around the Scottish neck. That is a most inauspicious start to a monetary union between Scotland and the rest of the United Kingdom. If we go ahead with this, it will raise the most complex problems of cross-border monetary policy, taxpayer exposure and multiple financial regulators. We have only to remember the crisis in the financial services in Scotland in 2009, when both our major banks, RBS and the Bank of Scotland, were bailed out to the tune of 211% of the GDP of Scotland. That is the extent of the issue if problems arise as a result.
	Any monetary union can come about only on terms agreed by the UK Government. The question then will be: who will provide the lender of last resort facilities to an independent country if there is little control over the tax and spending risk to which the larger entity is exposed? The committee put it in very straight language—language with which I agreed—when we said that,
	“the proposal for the Scottish Government to exert some influence over the Bank of England, let alone the rest of the UK exchequer, is devoid of precedent and entirely fanciful”.
	We have to go back to square one in how we approach monetary union. It is for the Scottish Government to come up with proposals, vague as they are at the moment.
	Another area that affects us is the issue of the single market in both domestic and European terms. If the integrity of the domestic single market has to be maintained, a lot of thought must go into the relationship between manufacturing and the financial sector on both sides of the border. I mentioned Aggreko. The chairman of Aggreko said that for his FTSE 100 company, it would impose a permanent layer of additional complexity, with headquarters and manufacturing in Scotland and listing elsewhere. We received a lot of evidence from the financial services community, particularly in Edinburgh, on that point, because 96% of its financial products are sold elsewhere in the United Kingdom, with 4% being sold in Scotland.
	The issue of the single market in Europe will also matter. I know that the noble Lord, Lord Kerr, has written extensively on the subject and made very wise comments on it. We have to assume that there will be a smooth entry, but there are big question marks over whether there will be. That smooth entry might provide some reassurance, but it will not provide much if the EU imposes tougher membership conditions relative to those of the rest of the United Kingdom in, say, financial regulation and employment law. The question that that sparks is: will that weaken Scottish competitiveness with the rest of the United Kingdom?
	One could say that that being the case, the Scottish Government might soft-pedal the negotiations on EU entry to delay such problems, but that would be a mistake. It would also be a mistake for the British Government not to come out with further information, as we have required. Professor John Kay, in giving evidence, said that post the referendum, that will entail years of complex negotiations. We must face up to that. We should not minimise the complexity of the negotiations but start to understand what the issues and problems are.
	Is there a climate of fear and uncertainty in Scotland today? Yes, there is an element of that. That was articulated by the leader of Glasgow City Council. It is for us to reduce that climate of fear and uncertainty and speak to one another in a civilised tone in this debate.

Lord Kerr of Kinlochard: I thank the noble Lord warmly for his reference to me. On the EU angle, does he agree that if an independent Scotland applies for membership of the European Union, the one thing that it cannot possibly obtain as an applicant from outside is a rebate on its budget contribution? Does he agree that if/when an independent Scotland becomes a full member of the European Union, all Scots will pay more into the budget than all English people?

Lord McFall of Alcluith: Absolutely. Mention has been made of the letter that President Barroso sent to the committee on 10 December 2012. I will quote two parts of that. First:
	“If part of the territory of a Member State would cease to be part of that state because it were to become a new independent state, the Treaties would no longer apply to that territory”.
	This means a renegotiation of all these treaties. The letter continued:
	“In other words, a new independent state would, by the fact of its independence, become a third country with respect to the EU and the Treaties would no longer apply on its territory”.
	The notion of a rebate, on that point, is really out the window.
	Secondly, speaking of Article 49, President Barroso went on to say:
	“If the application is accepted by the Council acting unanimously, an agreement is then negotiated between the applicant state”.
	I ask noble Lords whether we will have unanimity on a rebate for an independent Scotland. That notion not only vanishes; it is non-existent. I agree with the noble Lord on that.
	In my peroration I said that one of the chief executives said of the debate that nothing dispels a climate of fear and uncertainty better than the sunshine of information. I thank the noble Lord, Lord MacGregor, for providing that ray of sunshine in this debate on the economic implications of Scottish independence.

Lord Maclennan of Rogart: My Lords, I should like to thank the Economic Affairs Select Committee for having produced a report that raises many questions that need to be answered, some by the Scottish Government and some by the United Kingdom Government. However, some are not entirely answerable because they depend for their answers on global issues that are not necessarily predictable.
	There seems to be an optimistic assumption in certain quarters of Scotland that North Sea oil will provide a base for macroeconomic management of the economy. That seems to me wishful thinking of a kind to which we should not give any sustenance. The global price of oil could fluctuate considerably. As the noble Lord, Lord McFall, remarked, the costs of decommissioning will also have to be borne in mind. It is not entirely clear how much oil there is.
	There are many other uncertainties that need to be addressed. An overarching one must be the relationship between Scotland, if it becomes independent, and the European Union. The United Kingdom cannot resolve that of itself. It seems quite likely that, this being the first time that a member country has split up since the European Union was formed, there must be a certain amount of fear on the part of other countries, such as Spain, that we could be paving the way to a disintegration of the Union.
	Other issues that raise problems that cannot be foreseen, although their outcome can be discussed, are the effect of independence on the financial services industry, which is of such importance to Scotland. Some 7% of employment in Scotland depends on those services. I cannot comfortably predict that companies such as Standard Life would necessarily remain in Scotland if Scotland were controlling the domestic economy when Standard Life’s services would mostly be provided outside Scotland.
	That raises another issue that has been addressed by the committee, which is the attitude to currency. We have heard, even from those who are not necessarily favourably disposed towards the European Union, that the eurozone needs to have greater regulatory authority, fiscal uniformity and acceptance of centralisation of the management of the economy. That has some lessons for those who are thinking in terms of a separation of Scotland from the United Kingdom. I do not see how the First Minister can proclaim his desire to be part of the United Kingdom currency and have some kind of currency union without accepting that we will have to have monetary policy controlled by the Bank of England. The report raises the question of whether the Bank of England could readily accept that role or a regulatory role if it does not have control over the direction of the economy and taxation. Frankly, these questions are not answerable in terms of the prediction of policy, but they are important issues that ought to be discussed by those who are considering what the future might bring.
	It is disturbing that yesterday, in its main front page article, the Scotsman revealed that 60% of the members of the Scottish Chambers of Commerce have no sense of how this would all come together. That opinion exists despite the fact that the Government have brought out some very useful papers. We have to consider carefully how to get these messages across so that opinion-formers in Scotland can influence the way the debate is concluded. We also have to consider the division of debt between the two successor nations. That would weigh heavily on the independent nation of Scotland if it were formulated.
	The overarching question is whether Scotland, with a population of just over 5 million, would have any influence in global governance. I think it highly improbable. The fact that it would have very little say on trade matters, particularly if it were excluded from the European Union, would seem to bear down very heavily on Scotland’s prospects. The Government have to consider how best to get their messages across. Although I am very grateful for the three policy papers that have been analytically presented, they will not be given headlines in the organs of opinion or the media
	in Scotland. They will provide ammunition for individual speakers, but will not get through to the electorate. We need to have conferences in Scotland at which these issues are discussed. Such conferences would need to be directed towards those who will have some forward thinking about the prosperity of their own companies, and towards interest groups that will also be affected.
	I take the point made by the noble Lord about identity being one of the issues, but hope and fear will play a major part in the debate. We have to project a sense of hope about the British part in the improvement of the condition of the people of Scotland. It is not too difficult—we have a remarkable record. We are not unique in having this national debate about how to manage the economy at the moment; it would exist in Scotland if it were seeking macroeconomically to manage itself. However, the prosperity of the country is at grave risk if we do not resist these arguments about identity. We can—and in the modern world we should—have multiple identities.
	I was very surprised to read in the report produced by the Scottish Government’s Fiscal Commission Working Group, published in February of this year:
	“Under independence, the Scottish Government would be responsible for the design and implementation of its own macroeconomic framework”.
	That is an impossibilist view—for a small country such as Scotland to manage its macroeconomic future by itself without acknowledgement of the influence and importance of the integration of the domestic market in the United Kingdom, the possibility of greater integration in the European Union and the possibility of having more influence on the direction of the global economy.
	I beg the Government to think about how they can get their very wise messages across to the people of Scotland. If we leave it too late, arguments from identity could prevail, which would be potentially disastrous.

Lord Rowe-Beddoe: My Lords, as a Welshman I have more than a passing interest in matters devolutionary. I was therefore most pleased to learn of this inquiry, which was the first subject undertaken by your Lordships’ Economic Affairs Committee at the time of my appointment.
	Unlike some of the headlines that greeted our report, which suggested criticism of the UK Government’s position, in reality we did not call for or indeed suggest detailed pre-referendum negotiations. We asked both the United Kingdom Government and the Scottish Government to define clearly their respective positions on the vital matters that we have raised. By so doing, it was our wish to inform the people of Scotland and provide for them proper understanding of both the probable and possible economic consequences resulting from a 2014 referendum. Whether plans are being made for an outcome for one side or the other is not the concern, though many of your Lordships, perhaps, may well say that they are.
	The Government have helpfully grouped our conclusions and recommendations into 17 sections, in which the Chief Secretary to the Treasury, in his
	response, “notes” our findings in eight sections, while “agrees” with our findings in nine sections. That is a better batting average than previous committees on which I have had the privilege to serve. I recall a question that was raised during the Chancellor’s Statement on the Barnett formula. I sat on your Lordships’ Select Committee on the Barnett formula, chaired by the noble Lord, Lord Richard, who is not in his place. The noble Lord, Lord Lawson, was also a member of that committee. We made many recommendations, but to my recollection, not one of them was accepted by the Government at that time. Of course, your Lordships can understand why, and why now even more so the question of the Barnett formula is kicked into the 2016 grass.
	However, as the noble Lord, Lord MacGregor, mentioned, the Government have started the publication of “Scotland analysis”—documents dealing with devolution and its implications; currency and monetary policy; and, in May, referred to by the noble Lord, Lord McFall, the financial services and banking. They are most helpful documents, but they will only serve the concerns that your Lordships’ committee has raised if they provide proper understanding of the issues and are given wider publicity, discourse and debate. More documents are promised—two or three, I believe—and that is to be welcomed. However, I remain deeply concerned that both Westminster and Edinburgh are not being as open as they should be to inform both peoples—each side of the border—in addressing our recommendations, very importantly, on “the red lines”.
	I should like to focus for a minute or two on two topics: business and the economy, and defence-related jobs. As the noble Lord, Lord McFall, mentioned, CBI Scotland remains greatly concerned with matters that it brought forward just four weeks ago. Its questions concerned anything from the meaning of a hard border between the nations, to the overseas markets in which Scottish businesses will receive consular support and how; Royal Mail, or its Scottish successor, continuing to be subject to the universal service obligation; and the transitional arrangements that are envisaged for diplomatic representation at the European Union prior to entry, the World Bank, the World Trade Organisation and so on. Its last paper lists many issues which exercised the membership. I think some noble Lords said that 60% were very unsure. All of these are, of course, exacerbated in this rather infamous phrase now “the climate of fear” that is clearly engendered—a phrase used, as your Lordships know, by one of our witnesses. Also, with the impression that your Lordships’ committee gained of a conspiracy of silence, by our failure—really it was a big failure—to receive evidence from many Scottish companies which we had asked, with, thankfully, four most notable exceptions which helped to inform our discussions in this area. This is not acceptable to the people and to the business enterprise of Scotland. They need and we—the rest of the United Kingdom—need, good solid information. I say again in support of Westminster that this does not mean pre-referendum negotiations, but that is very different from the red lines.
	In regard to defence and related employment, I am delighted that the noble Lord, Lord West, is in his place, for without him we would be most uninformed.
	As the House has already heard from our chairman, the noble Lord, Lord MacGregor, no Ministry of Defence official or Minister was prepared to talk to us. Currently, as we were informed, there are 11,000 regular Armed Forces and 4,000 Ministry of Defence personnel at some 50 sites in Scotland. By 2020, the number of regular Armed Forces is planned to rise to 12,500. In addition, as was pointed out to us, there are thousands of skilled jobs in Scotland as a result of Ministry of Defence capital spending. How will a separated Government of Scotland address that?
	I was rather taken this week with a paragraph in an editorial in the New Statesman, which said that, with Mr Salmond pledged to preserve so many features of the British state—the monarchy, the pound, the welfare system and NATO membership—independence looks increasingly like a solution in search of a problem. But—and it is a big “but”—the peoples of both Scotland and the rest of the United Kingdom must not allow complacency to influence our and their approach to this most historical and significant event. Whatever the polls may say now, I remind your Lordships that in 1995 Quebec voted “no” to separation from Canada by the slenderest of margins—50.58%—despite polls showing just 12 months earlier margins of 60:40 against.

Lord Forsyth of Drumlean: My Lords, it is a pleasure to follow the noble Lord, Lord Rowe-Beddoe. We have served together not only on this committee but on the Barnett committee. I also pay tribute to my noble friend Lord MacGregor, who chaired this committee absolutely brilliantly. I have never known so much work to go into producing the final draft report of any committee. I certainly enjoyed it, although I did find it a great discipline avoiding being too partisan on the committee. The report is not partisan—it sets out the issues fairly and objectively—and I hope that the House will indulge me now if I get just a little partisan, because I spent many weeks on good behaviour. My noble friend played an important part in bringing this document to bear.
	I am certainly a nationalist in the sense that I give way to no one in my passion for Scotland, but if I were a Scottish nationalist, by which I mean a separatist, I would be absolutely horrified on reading this report. I would be saying, “What on earth are Mr Salmond and our leadership up to? They have had 50 years to think about the answers to some of these questions, but not only do they not appear to know the answers to the questions but it would appear that no thought whatever has been given to these issues. Yet here we are embarking headlong on a referendum, which will take place in 2014, and what are my people”—if I am a nationalist—“thinking of? How do they expect to go into a referendum for that?”. That is to show that I am fair and balanced, looking at the issue from their point of view.
	The noble Lord, Lord Rowe-Beddoe, talked about the climate of fear, as did the noble Lord, Lord McFall, and my noble friend Lord MacGregor. Talking to businessmen and to the leader of the city council, we had evidence of that climate of fear. However, I do not need to tell my noble friend about it; he knows all about how Alex Salmond and the Scotland Office operate.

Lord Wallace of Tankerness: I hope that my noble friend will accept that it is the Scottish Government, not the Scotland Office.

Lord Forsyth of Drumlean: As my noble and learned friend knows, I am still stuck in the past on some of these devolutionary aspects. He is absolutely right. I am referring to the Scottish Government—or the Scottish Executive as they were quite rightly called until he changed that in an Act that I spent quite a lot of time opposing in this House—and the way they behave. My noble and learned friend—I am sure he will not be embarrassed if I say this—was invited to speak at, I think, the 25th anniversary—

Lord Wallace of Tankerness: It was the 50th.

Lord Forsyth of Drumlean: He was invited to speak at the 50th anniversary of Loganair. My noble and learned friend must have been a very good customer of Loganair when he represented his constituency so well. He was asked to do that but an official from the Scottish Government rang Loganair and said, “We understand that you have Lord Wallace speaking at this dinner; we think it should be a Scottish Minister”, and it withdrew the invitation. I have no doubt it was thinking about the financial support it receives for its airlines from the Scottish Government. This is the kind of brazen way in which the Scottish Government operate. Are we surprised that few businessmen were prepared to come to give evidence to the committee? The only great nationalist-supporting businessman with any credibility in Scotland who agreed to come and speak to the committee was Brian Souter, who has built a very successful business, but at the last moment—literally days beforehand—he cried off because he did not feel able to do so.
	A climate of fear is operating in Scotland. It comes from having a single party dominating a Parliament, without an upper Chamber of this kind and without very much accountability from the Scottish media. Despite that, the First Minister has found it extremely difficult to get cheerleaders for his campaign. He started off with celebrities, all of whom seemed either to live abroad or pay no tax in this country. He has got so desperate to find celebrities for his cause that he is now having to recruit the dead. Only this week we heard from Alex Salmond that Robert Burns would vote yes in the referendum. He quoted these lines from Burns as conclusive proof:
	“We’re bought and sold for English gold—Such a parcel of rogues in a nation!”.
	The “rogues in a nation” are not in this part of the United Kingdom; I think they may be north of the border. Of course, that is a reference to how the union came into being in the first place. We should remember how that happened. It came into being because of a financial crisis: something like a quarter of the money in circulation had been invested in the Darien scheme and the Scottish economy was no longer able to sustain that level of financial shock. The Scottish economy could not get access to the single market that was England and her Commonwealth. It was a trade deal. From the English point of view, it was a way of ensuring the succession of the Protestant monarchy, which was a matter of some controversy and of great national security because of the Jacobites.
	This union came into being on the basis of maintaining financial security and defence. They are the two matters that come out of this report as being threatened absolutely by the break-up of the United Kingdom now—from Scotland’s point of view, not England’s. The size of the Scottish economy relative to the English one makes it less important for England. Why would Scotland want to give up access to a single market—the rest of the United Kingdom—where most of its goods and services are sold? Why would it, after what we have been through since 2008, wish to remove itself from the security of the Bank of England, the Treasury and a larger country? Why on earth would it want to become so dependent on the revenue from North Sea oil, which, as the report points out, is a very substantial part of the revenue for Scotland as an independent nation, whereas as part of the United Kingdom it is a smaller part and therefore less vulnerable to fluctuations in the oil price? If that sounds like an academic argument, the tax revenue in 2012, as set out in the report, was £6.5 billion. That is 40% less than the previous year. The lack of stability, which dependency on North Sea oil would bring, makes the economic consequences for people living in Scotland very uncertain indeed.
	Then we have financial services—financial services that depend on the rest of the United Kingdom for most of their customers, and which also depend on having the security of the Bank of England and the whole apparatus that we have seen working so effectively. As my noble friend pointed out, the Royal Bank of Scotland and the HBOS part of Lloyds account for 1,254% of GDP for Scotland as an independent country. That makes Iceland look as if it was in a very secure position when the financial crisis came along.
	When confronted with these issues, answers come there none. On the question of the security of the Bank of England, we are told that it will be fine because, “We will have a representative on the Bank of England and the Bank of England will still stand guarantee”. Why would any English taxpayer wish to put their money on the line for a foreign country called Scotland? This is Walter Mitty economics coming from the First Minister of Scotland, who refused to come to the committee to justify his view.
	For those who think that there is some easy way out of this from North Sea oil, there is also the whole question of the decommissioning costs, estimated at some £30 billion and which have to be met by relief on the tax that would otherwise be levied on those oil revenues. Again, answer comes then none, except that the English should pay for the decommissioning because they had the benefit of the revenue in the early years. The lines that are being put are, “We can keep the monarchy and be independent, we can keep the welfare system and have the pensions and welfare administered by the English but be independent, and we can keep the security of the Bank of England”. They are nonsense lines and they are not being properly debated in Scotland as they should be. That is the danger, as the noble Lord, Lord Rowe-Beddoe, pointed out, when things happen on the basis of emotion.
	For those who want to see the future, the Minister very unwisely championed the Scotland Act through this Parliament. We are already seeing the first effects
	of what will happen. The Scottish Government now have the power to set stamp duty. They have just issued a consultation document in Scotland. They are refusing to say what the levels of stamp duty will be until after the referendum—I cannot think why. Everyone in the House will know that stamp duty on houses up to a threshold of £250,000 is 1% in the United Kingdom. In the consultation paper, the Scottish Government propose, as an example, that stamp duty should increase to 7.5% on any amount over £180,000 and 9.5% on properties worth more than £250,000. That is the first effect of these tax-raising powers. To say that an independent Scotland, with the volatility of North Sea oil revenue and all the other matters that I have pointed to that would damage the economy, would be able to reduce tax and not add to it is extraordinary.
	The Scottish Government are also, even now, setting up their own inland revenue called Revenue Scotland. We will have two sets of bodies collecting tax north of the border. It is being set up specifically to collect this new land and property tax—this mansion tax that is being imposed on the Scottish people.
	I am conscious that time is moving on. I started with a quotation from Robert Burns, which Alex Salmond claimed as his own. I have my own quotation, which I will try to translate later for those who may find some of it a little obscure. It is from the address to the Dumfries volunteers:
	“O let us not, like snarling curs,In wrangling be divided,Till, slap! come in an unco loun,And wi’ a rung decide it!Be Britain still to Britain true,Amang ourselves united;For never but by British handsMaun British wrangs be righted!”.
	That echoes the sentiments that are included in this report and is a clear endorsement that Burns was on the side of the Unionists.

Lord Hollick: My Lords, I would also like to thank our chairman, Lord MacGregor, for shepherding the committee so successfully through this review. As we have just heard from the noble Lord, Lord Forsyth, some committee members held strong and well known positions on the merits of Scottish independence. Others were neutral or undecided. All of us shared the desire to make sure that the Scottish electorate are as well informed as possible on the key economic issues before they vote.
	The main question for many voters is whether or not the Scottish economy will perform better as an independent nation, rather than as part of the United Kingdom: a simple question with no certain answer. The committee’s report identifies and sets out a number of crucial long-term issues, such as the choice of currency, the regulatory framework and the fiscal position and a range of transitional challenges. However, in the absence of detailed negotiations between the Governments in London and Scotland or a clear statement on red lines by both Governments, the outcome on all these matters remains, sadly, uncertain, which is far from ideal.
	As the noble Lord, Lord Maclennan, said, the Scottish Chamber of Commerce called yesterday, on the basis of a poll of 800 companies, for detailed discussion to fill in these information gaps. Its members complained that they do not know enough to take a view on the implications of independence for their businesses. Both Governments need to heed the demand for more and more detailed information if the referendum is to be more than a noisy beauty parade. A position paper setting out the UK Government’s approach to the division of assets and liabilities, the division of the tax base and of long-term oil decommissioning costs and pension liabilities is essential to any meaningful analysis of an independent Scotland’s fiscal position.
	The position papers published to date have been most helpful. Can the Minister give the House details of the further position papers to be published by the UK Government before the referendum? For its part, the Scottish Government must set out their views on these issues in their promised White Paper and respond to the clear message from the Treasury that the Bank of England would have no power to act in or for an independent Scotland. The problems that we have seen in the European Union, where you have a monetary union without a fiscal union, are evidence of the need to have a union around both issues. The Scottish Government also need to respond to the president of the European Commission’s view that an independent Scotland would have to apply for membership of the EU, an issue which they have tried to skirt round. Clarity and candour on these issues is essential if the referendum is to be more than voting for a leap in the dark.
	The IFS and other witnesses were in general agreement that, assuming that the split of assets and liabilities was in line with its share of the population and that 90% of oil and gas revenues accrued to Scotland, an independent Scotland would, at the outset, take its place alongside countries of a similar size, such as Denmark and Finland, as a prosperous, stand-alone country. To reach that position, however, some very difficult challenges must be addressed both during the transition and in the longer term. Based on 2012 figures, Scotland would assume a public sector debt of £93 billion, rising to £185 billion when pension liabilities, PFI liabilities and other liabilities are included. This is equivalent to 123% of GDP. Transferring the debt to Scotland in today’s challenging sovereign debt markets would be complex and fraught with enormous difficulty. There is also the continuing need to finance the annual fiscal deficit of some £18 billion. The Scottish Government must set out their detailed plans to manage this transition and to fund this level of debt in these markets.
	Upon independence, Scotland would be swapping the known and, by reference to population size, somewhat generous transfer under the Barnett formula for general tax receipts, which have not yet been separately quantified, and the significant and important receipts from oil and gas production. Professor John Kay pointed out that, by their nature, oil revenues are unstable whereas transfers under the Barnett formula are relatively secured. Professor Kemp pointed out that oil and gas tax receipts were vulnerable not only to prices and depletion but to the gearing effect of price and investment levels
	on production, so that a sustained rise in prices will lead to increased production of oil, whereas the reverse is true if prices decline.
	This uncertainty of income stands in contrast to the certainty of expenditure. Scotland, with free care and free tuition, already bestows a generous level of expenditure on its citizens—a generosity which will be compounded by having a faster rise than the rest of the UK in the share of over-65 year-olds relative to the workforce. The interplay of these factors leads to a higher risk of serious fiscal imbalance. What upsides does an independent Scottish economy have to offer to compete with these downside risks? Will the Scottish economy perform better if there is a greater degree of autonomy? First Minister Salmond and Mr Swinney believe so. Scotland, they say, would not have followed the Chancellor’s policy of cutting back on public investment and infrastructure and would have had the flexibility, subject to convincing the bond markets of course, to increase investment allowances to promote private sector investment and achieve a rebalancing of the economy.
	These are of course policies which many in this House have consistently advocated over the past two and a half years. The noble Lord, Lord Heseltine, has written persuasively about the benefits of handing responsibility for growth, investment, skills and business formation from Whitehall to the regions. He cited many examples of successful local and regional growth initiatives in and within other countries, but Scotland has many of these powers already and has chosen not to use some of them. Whatever the outcome of the referendum, all the nations and regions of the UK are likely to have more powers devolved to them.
	The Scottish Government need to address the concerns of Scottish business. Uncertainty is no friend of business or inward investors. The refusal of many Scottish businesses to give evidence was indeed disappointing. Those companies we met were, as noble Lords have said, insistent that Scotland remains part of the EU. Ironically, the UK Prime Minister’s in-out referendum might have handed a buttress to the SNP campaign for independence. RBS chairman Sir Philip Hampton was clear about the importance of the single market to Scotland’s important financial services sector. An ebullient Rupert Soames, CEO of Aggreko, who has been referred to, pointed out that although his HQ was in Scotland less than 10% of its business was there, and that if Aggreko is to continue to thrive it needs a single market and the benefit of an EU trade agreement. Mr Soames went on to say that the beneficial impact of independence on his business would be small, tenuous and unlikely to arise, whereas the disadvantages could be large, serious and very likely to arise.
	An independent Scotland’s decision to expel the Trident nuclear fleet from Faslane within days of independence would place a large question mark over the future of some 10,000 jobs, many of them highly skilled. When he gave evidence, Mr Swinney was vague to the point of complacency about the plans to replace those jobs and redeploy the skills. Other witnesses suggested that job losses among service, civilian and defence manufacturing personnel could amount to an additional 30,000. We had the benefit of the noble
	Lord, Lord West, to help us on this. The surprising reluctance of the MoD to give evidence deprived us of the opportunity to hear its assessment of the estimated job losses among military and civilian personnel if the policies of the Scottish Government were implemented. Can the Minister tell the House the UK Government’s estimate of the likely level of job losses in the defence and related sectors?
	There is no easy answer to the question, “Will an independent Scotland be more prosperous?”. Will it, at one extreme, be a huge hedge fund, heavily exposed to the volatile oil and financial sectors while burdened with a growing public sector deficit and unfunded pension and decommissioning liabilities? Or will it, at the other, become a munificent tiger economy like some of its Nordic neighbours? Unless and until the Scottish and UK Governments set out their positions clearly and address the questions set out in the report, the Scottish electorate can only guess at the answer.

Lord Shipley: My Lords, I have spent much of my life as a firm advocate of increased devolution in the United Kingdom. I would have voted for a Scottish Parliament had I lived north of the border. I have watched with enthusiasm the devolutionary trend in Wales, Northern Ireland, Scotland and London, and now increasingly in England, through local enterprise partnerships and the single local growth fund announced today. This will require local authorities to work more closely together in much more strategic ways.
	The debate today is about the extent of devolution and what responsibilities should follow from it. In recent years, the Calman report has made a number of important observations and recommendations about Scotland. In the north-east of England we had a referendum on whether to have a regional assembly, which would have introduced an elected regional dimension of a kind similar to Wales. As we know, in that referendum an assembly was rejected, but other solutions for joint working have had to be found. Coming from the north-east of England, I feel a very close association with Scotland. There is a lot of close working between Scottish and north-east institutions, which I want to see enhanced rather than being made more difficult.
	The report of the Economic Affairs Committee on the economic implications for the UK of Scottish independence is therefore timely and important. As we have heard, it is the outcome of a lot of work. I, too, pay tribute to our chair, the noble Lord, Lord MacGregor of Pulham Market, for his leadership of our committee over many months. We concluded that the implications of Scottish independence are too important to be left unexplained, either for those in Scotland with a vote in the referendum, or those elsewhere in the UK with an interest in the outcome of that vote.
	The title of our report is important. It addresses the economic implications because this can never be just a political debate, which takes me to the referendum. Like others, I have not understood why the referendum due next year will be a vote in principle. In the case of a yes vote, negotiation after that decision in principle will be undertaken in a very limited period of time,
	which is clearly too short. This does not seem to me to be the right way to run a referendum. As our report states:
	“Voters in Scotland deserve the best evidence-based assessment of the likely economic consequences of independence”.
	Because independence would have consequences for the whole of the UK, everyone living in the UK needs to understand what the economic consequences may be for them. It follows that voters who will make the decision in Scotland should not be expected to do so without a full explanation of the matters they should consider before casting their vote. For example, Scotland and the rest of the United Kingdom have benefitted from a single market which enables free trade and investment. Differences in currency, regulation and levels of taxation could all have a significant impact on both the United Kingdom and Scotland. Voters need clear information.
	Paragraph 20 of our report makes the point that:
	“The United Kingdom single market has helped the Scottish financial services sector to grow”.
	However, as we point out, on its own the Scottish economy is dwarfed by the balance sheets of Scottish banks, with the total assets of RBS and HBOS being over 15 times Scottish GDP. The Chief Secretary to the Treasury and the right honourable Alistair Darling were correct to remind us that UK government support for RBS amounted to more than 200% of Scotland’s GDP. As the Chief Secretary to the Treasury said in his reply to the Committee's report, if Scotland were to separate from the UK, this integrated domestic market would split into two separate markets, subject to separate legal and regulatory regimes. This could create additional difficulties for financial services firms and increase costs for households and businesses in areas such as pensions, ISAs and insurance. It could also mean that consumers living in different parts of the UK were offered different standards of protection when purchasing financial services. I am not sure that all these matters have been fully understood by consumers both sides of the border and they need to be so.
	I shall not say much about defence or currency—the issues have been well explained in our report. However, on defence, I was interested in the report of the Scotland Institute, published on Monday this week, which said that independence would result in a “wholesale dismantling” of Scotland’s defence industry and that the process of separation from the UK would be “a monumental task”, with the consequences “deleterious” in which Scotland would have a defence force which,
	“hardly constitutes an armed force in any meaningful sense”.
	That report should be taken note of.
	Public spending per head in Scotland is higher than in the UK overall. It is not clear why it should be, although one understandable factor is geographical size—and then, of course, there is the Barnett formula. In 2011-12, spending in Scotland was 11% higher than in the UK overall. If Scotland became independent, that level of public spending as a share of the UK’s budget would not continue. As we have heard, oil revenues might make up the difference, but they could be uncertain and would fluctuate. The best estimates are that the Scottish sector would receive net tax revenues from oil production of between £5 billion and
	£10 billion a year. The difference in revenue between years could of course be substantial. If the division of the physical assets was on a geographical basis, 90% of oil reserves would be in Scotland and, broadly speaking, the tax gain would make up the loss of the Barnett formula, although people would need to be clear—again, as we have heard—about the consequences of decommissioning costs. Overall, it would seem that in the past five years the average annual tax revenue from oil and gas has been just over £9 billion, but that is one-fifth of onshore tax revenues for Scotland but less than 2% of the UK’s onshore tax revenues overall. I think that there would be a serious overdependency on oil if Scotland became independent.
	The committee concluded that that a division of financial assets and liabilities should be on a population basis, but that the process would be complicated. We emphasise in paragraph 91 that the Scottish Government should explain to voters before the referendum exactly how they would plan to take over their share of public sector debt and liabilities.
	Then there is Scotland’s credit rating. It will almost certainly have to pay a premium on its debt because of its small size. It is important that the Scottish Government should be clear to voters what level of debt Scotland will carry and how that debt will be serviced.
	On tax revenues, the Institute of Chartered Accountants of Scotland reminded us that there are no official statistics for tax raised in Scotland; in other words, we do not know what the gap is between tax revenue raised and the spending of block grant. It seems pretty fundamental to the referendum that people should understand the current tax yield for Scotland. I understand that Oxford Economics has done an exercise which has shown that there could be a fiscal deficit even if we counted all oil and gas as Scottish, which is unlikely to be the case. Official statistics are needed nevertheless, otherwise how do Scottish voters make an informed decision? We should note that the Institute of Chartered Accountants of Scotland also said that to design a new tax system for Scotland could take a decade.
	There is a whole set of assumptions about how independence would be progressed in the event of a yes vote, but the issues are not as straightforward as some would wish them to be: on currency, on credit rating, on tax, on assets and liabilities, on loss of the Barnett formula, on oil and gas reserves, on EU membership, on pensions, on regulation and on defence. All need to be clearer before people are asked to make an irrevocable decision. The Chief Secretary to the Treasury, in his reply to the report, agreed that:
	“It is crucial that the referendum debate is properly informed”.
	As we have heard, papers are now being published and we should welcome that.
	However, we also need to identify the cost of independence—of the process and the need to create a separate system of government. The issue cannot simply be: “Should Scotland be independent?”. Rather, it is whether Scotland—or any other part of the United Kingdom for that matter—can be independent in economic as well as political terms. Our report shows that Scotland would face similar constraints to now
	should it become independent. Indeed, it shows that those constraints may well prove to be even greater than they are now.

The Earl of Caithness: My Lords, I was not fortunate enough to be a member of the committee chaired by my noble friend Lord MacGregor, but I thank it very much for its work and its very readable report.
	I will follow on from what the noble Lord, Lord Shipley, said, right at the end. Independence is a misnomer for what is proposed. There is no way that Scotland is going to become an independent country. It could become a separate country and exist as one— although to what extent that is possible and how successful it would be is not yet known—but it would certainly not become an independent country. If it wants a sterling area, it will be subject to the Bank of England, and if it is to have its own currency—which I will come on to—and wants to join Europe, it will be subject to all the rules and regulations of Europe. Even if it stays out of Europe, it will be in the same position as Norway, with most of its laws having to abide by those decided in Europe, over which it would have no input.
	With the situation as it is at the moment, I believe that we are in potential danger of sleepwalking into a disaster, because there is a stand-off between Edinburgh and Westminster. Mr Salmond has set out his stall very clearly, saying:
	“The plan is to do what is appropriate and in the best interests of Scotland”.
	He wants to negotiate on a number of issues and the UK Government have said that they will not. That worries me, because we do not have the information to make a decision, and the longer that goes on, the more chance there is of a yes vote. In the event of a yes vote, it will certainly be no velvet divorce—it will be a very nasty situation. I do not think that a no vote is by any means certain, given the latest opinion polls. I have detected a feeling that separation is better than the status quo, but they do not know what separation is. At a time when the SNP has made a number of changes of position on fundamental issues as it struggles to find a coherent set of positions prior to the vote, the opinion polls are not really moving to reflect that. There has certainly been little change in people’s perception about the economy but Mr Salmond’s plans for corporation tax have been condemned as,
	“an excruciatingly awful piece of work”.
	Perhaps that is not surprising since Mr Salmond not only signed a letter in support of Mr Goodwin when he was RBS chief executive and bidding for ABN AMRO, but signed it, “Yours, Scotland”.
	Let us please have some answers from the Government. What will be the position with regard to the Scottish banks—RBS and HBOS—considering that they were bailed out by the UK taxpayer? Can my noble and learned friend give a definitive statement that there will be no formal sterling area? The Chancellor, my right honourable friend Mr Osborne, has hinted that he does not think it is in the interests of either Scotland or the UK, but there needs to be a stronger statement than that. Mr Salmond has, on a number of occasions, made his demand for a sterling area a prerequisite for
	a settlement on the disposition of assets and liabilities. We need to be absolutely clear whether the Government will negotiate on a sterling area or not. Of course, if there is no formal sterling area, Scotland could retain sterling, but all analysis has shown that this would be bad for the country and it would probably be better for it to opt for its own currency. If it does so—indeed, it might be sensible to do so—it will have to have all the necessary financial institutions, including its own central bank. If it wants to join the EU, it will have to have its own currency up and working for at least two years to meet the requirements imposed for new EU membership.
	It is well known that a separate Scotland would want to join the EU. Can my noble friend say whether it will be a net contributor or beneficiary of the EU budget, and, if so, by how much? Can my noble friend confirm that the UK’s abatement will stay with the rest of the UK and not with Scotland? These are some of the fundamental questions.
	To me, the most critical question is how one settles the matter of assets and liabilities. Will the assets—in particular, oil and gas—be apportioned on a geographical basis, as recommended in the report? What would be the situation should Orkney and Shetland decisively vote no to a separate Scotland and negotiate with the Scottish Government to have a separation? How would that affect the geographical assets?
	As for liabilities, it is crucial that we know what the plans are for the public sector debt. Will it be apportioned on a population basis, as suggested in paragraphs 86 to 89 of the report? Paragraph 87 states that by 2016 the public sector debt would go up to £185 billion, based on current figures, if you add pensions and other such costs. Indeed, the public sector debt will increase, so the figure will be somewhere between £185 billion and £213 billion, in round figures. Whatever the figure, it is a colossal sum of money, and Scotland does not have that amount of money.
	How will it be financed? Will the Government accept an IOU, and, if so, on what terms? If there are no appropriate guarantees and securities, it would be similar to losing 10% of your economy while retaining all your debt. That is a hugely worrying situation. Not only do we, who are going to vote on separation in September next year, need to know that information; more importantly, the markets need to know it. If the markets do not know it and begin to sense that there might be a yes vote, I fear very much that speculators will cause havoc in the markets with the pound sterling. The Government will then be in an infinitely more difficult situation in which to negotiate any deal with the Scottish Government. That scenario is extremely worrying and can be avoided.
	I thought that the letter accompanying the Government’s reply to the report was contradictory. On the one hand, the Chief Secretary says that he wants as much information as possible and that all of us in Scotland who are going to vote should know all the facts. He then goes on to say that he is not making any plans for Scottish separation in the UK and is not going to negotiate. That is a totally contradictory position and, I say to my noble friend on the Front Bench, a very unhelpful one.

Lord Lipsey: My Lords, I join in thanking the noble Lord, Lord MacGregor, for his brilliant chairmanship of this committee. It was a bit like climbing Ben Nevis in slippers while hoping that the view from the summit repays the labours that have gone before. Indeed, the response to the report has been fair and favourable. I think the reason is that we were very objective in our approach. Some on the committee have, you might say, form on this issue—the noble Lord, Lord Forsyth, will not mind me mentioning him in this context. However, others—and I count myself—have no form on it at all. I had not thought about the issues since I was one of those advising the Callaghan Government on their rather ill-fated attempt at devolution. From that position, we as a committee took evidence, learnt, pondered and, unanimously, concluded.
	As an Englishman who lives in Wales, I do not have a vote in the referendum in 2014, and if I did I would have mixed feelings about how I would cast it. On the one hand, I am very aware of how much Scotland, over three centuries, has brought to the national table culturally, intellectually and economically. I am also aware, as a loyal member of the Labour Party, how much it has brought to my party. It has been traditionally strong in Scotland, and Scotland has given it some of its greatest leaders, from Keir Hardie on. However, wearing another hat, as a taxpayer, I feel very differently. I hate paying for the extravagances of the Scottish Government. It weighs particularly heavily on me that the Scottish people have free care for the elderly, which was a recommendation of a UK royal commission chaired by a distinguished Scot, the noble Lord, Lord Sutherland, to which I appended a note of dissent on this point. I do not mind them doing that if that is what they want to do—although I think it is daft—but I object to my pocket being tapped to pay for it. As I said, I do not have a vote, but if I were a Scot, and if I had read, marked and inwardly digested the report in front of us, what then? I would pay a piper to escort me to the polls to the ancient Scottish reel, “Will ye no, no, no to independence”.
	I will not go over in detail all the arguments in our report and which the noble Lord, Lord MacGregor, and other noble Lords have so eloquently laid before the House this afternoon. However, as we took evidence, it struck me that there is a very strong asymmetry between the economic arguments for independence and those against independence. One of the arguments for independence is that it will of itself set loose Scottish entrepreneurial spirits and result in a huge economic boom. These arguments are nebulous and theoretical. They are hopes and dreams and have no substance, and no economist will tell you that these things will happen. In contrast, the arguments against independence are concrete and powerful, and, if I were a Scot, they would frighten me half to death.
	I will cite some examples. As regards North Sea oil, if the price of oil goes up, the Scottish people will get a wee bit more revenue. However, if it goes down, they will not get a wee bit less revenue because, quite close to the present price, you get to a stage where it is not worth getting the damn stuff out of the ground, so
	they get no revenues. Furthermore, that loss of revenue will not be shared over an entire United Kingdom, with many taxpayers taking the burden. It will fall entirely on the Scottish taxpayer.
	As for national debt, Scotland cannot simply take over a share of Britain's national debt, as that debt has been legally incurred by Britain as a whole. It would have to fund its share by issuing its own bonds. It is by no means obvious that international markets will be racing to buy them, from an untested Government in a brand-new country, whose economic viability has yet to be proven.
	A related issue is monetary policy. None of Scotland’s choices of currency is very attractive, is it? SNP policy used to favour the euro but recent events have led it to drop that. There is the pound sterling but the dangers are palpable for an independent Scotland in having a currency run by the Bank of England whose duty is to run it in the interests of England. There is the groat but will investors want a groat-denominated Scotland bond? I do not think the queues will be very long down the streets of Glasgow and Edinburgh.
	Then there is European Union membership. If Scotland goes independent it will, ipso facto, not be a member of the EU—despite the protestations of John Swinney, among others. The rules are perfectly clear and have been clarified by the British Government as well as by the president of the Commission. Scotland can apply for membership and no doubt it will, but many existing members will be very pleased to block it, if only to scare their own local separatist movements. As the noble Lord, Lord Kerr, made clear, the chances of Scotland getting a rebate would make a snowball’s lifetime in hell seem, in comparison, a long one. Then, is a county the size of Scotland outside the EU likely to remain, as Scotland has hitherto been, a first choice of headquarters for major companies and financial institutions? I doubt it.
	In my heart, I have some sympathy with those Scots who want independence. I love the country very much. I was up there only recently and its beauty and the character of its people commend it to us all. I can quite see that if I were a Scot, I would find it a bit much to be part of a larger country that still hankers after great power status when I want it to be a decent little social democracy going about its business. Those things will weigh but the Scots are a canny people. When the referendum comes, they will weigh the arguments and come to understand that they are faced, in independence, with a huge threat that could ruin the remaining prosperity that exists with them. I cannot help but believe—and from their viewpoint, hope—that they will stick with auld acquaintances for the sake of auld lang syne.

The Earl of Mar and Kellie: My Lords, the noble Lord, Lord Lipsey, was very lucky that he still had his slippers on when climbing the Ben, because for me this is an even grimmer debate. I read this report with interest and found it helpful. The committee and the United Kingdom Government presume a victory for the “no” campaign. The committee has considered its angle on possible economic implications which, while
	significant, are of course not the central point of the referendum. I will talk more about constitution than economics.
	The committee did not consider the central issue, that of Scottish democracy and self-government. In a sentence: with political independence the people of Scotland always get the Government of their choice. The “no” campaign has not brought forward enough about Scotland’s possible future within the United Kingdom. The “no” parties have probably not finalised their positions. The presumption is of greater powers for Scotland, though I wonder whether there is much more that could be devolved if the four pillars of reservation are to be retained: defence, foreign affairs, macroeconomics and welfare. I hope that my Liberal Democrat noble friends will develop and promote their federal proposal, similar in many ways to that successfully established in Germany after 1945. This federal solution would at least secure a limited sovereign status for the powers of the Scottish Parliament and also define and limit the powers of the United Kingdom Parliament as the federal Parliament.
	King James VI was, I believe, keen to become the emperor of Britain in 1603, arguing that he presided over three sovereign states thereby creating an empire. He failed to win his argument. Unfortunately, he also failed to secure sufficient entrenchment for his Scottish kingdom. That made possible the disappointing development of the incorporating union agreed in 1706, led and driven by the Earl of Godolphin.
	Heading back to the report, the committee produced a list of the risks of leaving. I ask that the risks of staying be considered. Some of these are as follows. First, as the noble Lord, Lord Lipsey, mentioned, there is involvement in wars which more meet England’s need to be a major power. Secondly, there is the risk of being removed from the European Union because people in south-east England think they will be better off outwith it. Thirdly, the United Kingdom Government might continue to act without consent from Scotland, as happened over the development of the Clyde naval base. Fourthly, consider this: if the people of Scotland wished to develop into a Scandinavian-style social democracy, they would not be allowed to do so. I am sure there are many more risks.
	I turn to the use of campaign metaphors. The “no” campaign would have us use the divorce analogy while “yes” campaigners use the metaphor of the family growing up and going their own ways. Noble Lords will generally be familiar with the risks of entering into a marriage and of selecting a career. Neither can political independence be risk free. There seems to be a presumption in the report that the SNP will form the Scottish Government in 2016. I suspect that Labour may well form the Scottish Government, somewhat perversely, after a “yes” vote. In that case, today’s Scottish Government can hardly make hard and fast predictions about what will be negotiated.
	It concerns me that the committee seemed to approve of the idea that after a “yes” vote the remainder of the United Kingdom Government should act in a generally hostile fashion towards Scotland, despite the continuation of the regnal union. I know there is the precedent of
	the trade war with Ireland, which has at least been worked through. That is curious behaviour for the mother of Parliaments. It smacks of “Leave me and I’ll make your life miserable”—surely a relationship with a poor foundation.

Lord Forsyth of Drumlean: I am most grateful to the noble Earl for giving way. Where in the report is there any suggestion that there would be hostility towards an independent Scotland? The report goes out of its way to avoid any language of that kind. Surely the noble Earl is not suggesting that it is hostile to say that if Scotland became independent it could not expect the Bank of England to look after its interests. That is a matter of fact, not of hostility or gentility.

The Earl of Mar and Kellie: My noble friend is probably right but I read the report and that is what I felt.
	Finally, Scotland needs to emerge from its 300-year constitutional sleep. Clearly, the limited powers granted in 1998 were the early stages of that awakening. Our neighbour and comparator country, Norway, emerged in 1905 from a 400-year constitutional sleep. After becoming one of the poorest countries in western Europe, look at it now. The key is that it achieved democracy before it obtained wealth. It decided in 1990 to set up a sovereign wealth fund. The United Kingdom decided not to do so, thereby depriving Scotland of any choice in the matter. I am confident that there will be more constitutional developments in favour of Scottish autonomy irrespective of the actual referendum result. After all, the status quo is not on offer as the Scotland Act 2012 will be implemented between now and 2016. There must be more such developments because a sustainable, permanent settlement is needed. Economics, though significant, must follow the new settlement.

Lord Lyell: My Lords, I shall not attempt to follow the noble Earl, whose family goes right back into Scottish history, even to the death of James I in Perth in 1437. We Lyells are mere pawns on this massive chessboard of Scottish history. I am a resident of Angus and declare such interests as are in the register. I have one other particular interest to declare and I was thrilled and happy to hear the wonderful comments and support of the noble Lord, Lord Shipley. I am a member of the Institute of Chartered Accountants of Scotland. I am proud of this and declare that interest. That is why I thank my noble friend Lord MacGregor. If I may take 10 seconds of your Lordships’ time I will say that his is an outstanding report, quite one of the best that I have had the pleasure of reading—and even understanding—in all my years in your Lordships’ House, because it sets out a number of problems and queries.
	Originally in 1962 I thought the symbol of the Institute of Chartered Accountants of Scotland was a vulture with the word “vigilance” underneath. That cost me three extra weeks of working on a Saturday. In fact, the motto is “seek the truth”, which is exactly what my noble friend and his committee have done,
	and I as a Back-Bencher and possible Scottish taxpayer thank them very much for their work. With the amount of material it contains, the report is almost indigestible, but where it goes into detail it is perfectly relevant, enormously helpful and very clear.
	With your Lordships’ permission, I shall concentrate on chapter 7, dealing with fiscal aspects and tax. I ducked low when I heard the comments of my noble friend Lord Forsyth about stamp duty and landfill, and this happy new institution known as Revenue Scotland. It sounds friendly, but I wonder how it will develop and grow. I was rather cynical and thought that I would add the comments of the famed Frenchman Jean-Baptiste Colbert, who said that the art of taxation was to pluck the feathers from the goose until it either does not squeal or you get away with it. Colbert, who lived from 1619 to 1683, was chief minister of Louis XIV. He finished that aspect of his life and, indeed, died in 1683. I hope it was not plucking geese that hammered him, but you never know.
	Discussing personal tax in Scotland has been like a shuttlecock going between my noble and learned friend on the Front Bench and my noble friend Lord Forsyth. Who will and who will not be a Scottish taxpayer? My noble friend Lord Forsyth, my noble friend Lord Courtown, who, alas, is not here, and I have an annual ski race in Switzerland. Once a year we head down the ski run, terrified. There are 46 gates and an icy slope and I wonder what will be new this time. Will I survive or will I fall? It is exactly the same with the definitions of who will and who will not be a Scottish taxpayer. Perhaps my noble and learned friend will write to me in the course of the next week or two about any developments or any new concepts of the Scottish back-tax payer since his last comments when he spoke in a debate with my noble friend Lord Forsyth.
	I refer your Lordships to paragraph 180 of the excellent report of my noble friend’s committee. It looks at the lack of data about who would be an identifiable Scottish taxpayer for the purpose of income tax and the Scottish variable rate. Paragraph 94 refers to the Institute of Chartered Accountants of Scotland which stated:
	“Let no-one be misled, there are no official statistics for tax paid by those in Scotland”.
	That was referred to by the noble Lord, Lord Shipley. It seems there is even now no definite basis on which to decide who is or is not a Scottish taxpayer and we have only two years to go before we have to start thinking about what to do.
	The report states that in 2009-10 the top 1% of Scottish taxpayers paid £2.1 billion. Whether the individuals total 4,000 or 2,500 I could not be sure—it depends on the definition by Professor Bell—but the amount of income tax they paid was £2.1 billion. That seems a fair amount. Simple arithmetic shows what is being paid by these individuals. The Scottish variable rate has been mentioned and is part of the calculations referred to by my noble friend Lord Mar and Kellie. If this system is put into effect it will mean that each and every taxpayer in Scotland may well have to fill in not one, but two tax returns. The Scottish variable rate, as presented now, will have differing rates and allowances.
	This takes me back to my early studies of tax law in Scotland in 1962 and earned and unearned income. Earned income is spelled out in the Scottish variable rate in the Scotland Act and unearned income will be pensions and rents. I hope that I am not being unjust to my noble friend Lord Forsyth, but he indicated that one of the many thoughts he had was that every pensioner south of the border would scuttle north of the border because their pensions and other non-earned income would not be subject to the Scottish variable rate. I hope I am not maligning him. He may take it up later if I am.
	Some chartered accountants sent me a wonderful briefing saying that they were not aware that the question of finance and tax was of paramount importance to all Scots. Indeed, they referred to the three “f”s of football, fishing and fashion as being of much more interest. I was not necessarily aware of that—certainly not looking at the fashion in Kirriemuir on a winter day. However, I am immensely grateful to my noble and learned friend, who has given so much help so far. Will he now confirm to me that pensions will be part of the Scottish variable rate? I glanced at an instructive programme over the weekend which said that 90% of the mortgage and pension products of the Scottish financial industry go to customers and clients with a non-Scottish postcode—I assume that is across the border in what might well be a separate country.
	That is quite enough about the Scottish taxpayer, fiscal matters and chapter 7. However, I thank my noble friend for his excellent report. Even I can understand it and I hope that if these comments are reported in Scotland, chartered accountants will not kick my shins too hard because I hope that I have got it right.

Lord West of Spithead: My Lords, to my mind the separation of Scotland would diminish the defence and security of all of us. The SNP statements on defence just do not stack up. The complexity and cost of establishing a new Ministry of Defence, all of the administrative functions and intelligence, logistics, medical support, training and procurement organisations are absolutely huge. Just looking at the intelligence world, for example, would a separate Scotland want a GCHQ equivalent? Having worked in that world for a time, I can assure your Lordships that this is hugely difficult to create and hugely expensive. Would it have an SIS? Again, there are huge complexities in doing something like that. Would Scotland be part of the Five Eyes arrangement? I have severe doubts, because the Americans would not be at all happy to have a country in the Five Eyes which has said the sort of things about nuclear that the SNP has said. Bearing in mind all of those costs and with the money that, by any calculation, one could see being available for defence in a separate Scotland, the front line would be dramatically smaller than the figures that the SNP has talked about.
	To talk of Denmark as a comparator is nonsense. Denmark at one stage had a very large military and over many, many, many years has reduced it, so the infrastructure was all there and all those things were there. That is not an accurate comparator. There would be huge implications for the forces available. There would be massive job losses, to my mind, at Faslane,
	where jobs would be down from about 8,500 to, at a maximum, about 500 if you consider the force level that Scotland will have in terms of ships. I believe that there will be massive job losses elsewhere in Scotland. It is very unfortunate that we have had no accurate assessment from the MoD or the SNP of the reality of what those would be. A lot of nonsense has been talked.
	As has been mentioned, the large defence firms would without doubt come south. I have talked to the boards of some of those firms; they are scared stiff to mention anything about it. I think that that is appalling. There is a climate of fear. They would move south because there will be no money, or tiny amounts, for procurement in Scotland. Those firms move where the money is. That is bound to happen. I think it is quite likely—a horrific thought, because I went to school up on the Clyde and remember seeing magnificent ships being built there—that warship building would finish on the Clyde.
	The SNP positions on nuclear weapons and being part of NATO, which is a nuclear alliance, are, to say the least, confused. I think that they are totally confusing and make no sense at all. I am not sure where the SNP stands on that.
	To end, because I may speak for only a short time in the gap, I believe that it is the task of the military to plan for the unexpected. That is our job; that is what we have to do all the time. Even with very unlikely things, we have to be prepared for the unexpected. For us not to be looking at the defence implications of the separation of Scotland and doing contingency planning is, I believe, dereliction of duty. That work should be going on. I hope to goodness that it is going on somewhere, because if it is not, that is wrong. There is a very short timescale and it is important. Should separation occur, I fear for the future security of our islands, on which we all live.

Lord Davies of Oldham: My Lords, the House owes a debt of gratitude to the Select Committee and to its chairman, the noble Lord, Lord MacGregor, who introduced this debate. It has clarified issues that we all know need clarifying. I hope that the Minister will aid in that clarification. I hope that he is able to give forthright answers to certain questions addressed directly to him.
	I shall keep my contribution short, in keeping with the declining length of the contributions as the debate has gone on. It is quite clear that there is broad unanimity in the House about these issues and the necessity of getting out the arguments behind them. What worries me is the obvious point that we have been debating this issue in a vacuum today because there is no member of the Scottish nationalist party to represent a different perspective. The noble Earl, Lord Mar and Kellie, did a little to introduce a discordant element, and even provoked the noble Lord, Lord Forsyth, although provocation is unnecessary for the noble Lord, who was able to bring the Scottish First Minister among us without any difficulty and argue with him forcefully, to such an extent that I found myself nodding in agreement with almost every word that the noble Lord expressed.
	That is the nature of the problem. I went to a meeting of the Economic and Social Research Council the other day, which it held in Portcullis House. It indicated the significant areas in which it intended to carry out research to clarify fundamental issues. I was delighted by that, because, apart from the work of the Select Committee, very little seems to be going on on the issues. What worried me about the Economic and Social Research Council’s approach is that it seemed to have that slightly leisurely quality that academics tend to bring to the necessary research proposals that they are to follow through. The issue is urgent. When we have clarified the issues, the question is: can we communicate effectively to people on the other side of the debate who at present have expressed a great weight of opinion, often in extremely emotive terms, which we need to confront?
	I think that in this debate we have clarified all the key issues that ought to exercise people in their concern about the future of an independent Scotland and the risks involved. I hope that we can present those issues in the context that we are all part of the United Kingdom, with excellent relationships among all its parts, and that in no way, shape or form should we let there be any suggestion of punitive action by the Bank of England or anyone else if the vote went the way of independence. I hope that the result of the work of the Select Committee and all the expressions of opinion in the House today, perhaps with the exception of the noble Earl, will be concern about how the issues are to be presented to the Scottish people and how the cases are to be presented effectively.
	The Minister can aid us a great deal by indicating how the Government are going to play their part in that. However, this is an issue not for the Government but for effective campaigning to win the hearts and minds of the Scots for the continuation of the union.

Lord Wallace of Tankerness: My Lords, first, I welcome today’s debate discussing the important report from your Lordships’ Economic Affairs Committee. I thank all committee members, but I thank in particular the committee chairman, my noble friend Lord MacGregor of Pulham Market, who introduced the debate. Although I pay tribute to all who have contributed to the debate, perhaps I may pick out the noble Lords, Lord Rowe-Beddoe, Lord Hollick, Lord Lipsey, Lord West and Lord Davies of Oldham, on the basis that they are non-Scots. In making the case of the United Kingdom, I think it is very important that we hear voices from outwith Scotland saying how important the union is for all of us.
	We have heard valuable contributions. I share the view of the noble Lord, Lord Davies, that it is perhaps unfortunate that there is no representative of the Scottish National Party in this House. That is the party’s choice and a matter for it, but it would have been useful, not least to answer some of the legitimate questions put. My noble friend Lord Steel of Aikwood interrupted my noble friend Lord MacGregor to say that it was odd that, having had two years since we knew that this referendum was coming, the Scottish Government
	had not come up with the answers. My noble friend Lord Forsyth hit the nail on the head when he said that it has been Scottish National Party policy for more than 50 years. One might have expected that, as it has been its policy, it might have had some answers, rather than either the deafening silence or the change of position which we sometimes get.
	Perhaps I may say something about the tone of the debate that we expect in Scotland. It is important that we have a rational and well reasoned debate. I have heard the concerns expressed by a number of your Lordships from all parts of the House about the fears expressed to the committee. I will not comment further, but I can confirm the withdrawal of my invitation to a 50th anniversary dinner referred to by my noble friend Lord Forsyth.
	It is healthy when we get contributions from people who do not necessarily have any axe to grind. My noble friend Lord Lyell declared his interest as a member of the Institute of Chartered Accountants of Scotland. That institute, with its distinguished history, has indicated that it will not come out on one side or the other but has already shown its willingness to ask pertinent questions, not least with regard to pensions. It is important that bodies such as that, which have a track record and can be seen as having professional status in Scotland but are not backing one side or the other, make such a contribution.
	As we approach the referendum in September next year, it is important that both sides of the debate are robust in their arguments but conduct them with respect and, echoing what has been said, with information. I welcome the fact that a number of your Lordships who have contributed to the debate have commented on the Scotland analysis papers. The three that have been published so far are fairly heavy tomes. I can confirm that another will be published in the next few weeks. To inform the debate, we as a Government have undertaken that programme. There will be further papers on the United Kingdom’s position in the world, the protection of our citizens and defence, the economic benefits of the United Kingdom, and as my right honourable friend the Chief Secretary said in replying to the committee, on issues such as energy and welfare, as well as the important issue of pensions, mentioned by my noble friend Lord Lyell.
	In addition, I have heard the disappointment expressed about the Ministry of Defence, but it has contributed to a number of other Select Committees. My right honourable friend the Secretary of State for Defence is to give evidence to the Defence Select Committee next week. There have been reports by the Scottish Affairs Committee, to which evidence has been given. The noble Lord, Lord Rowe-Beddoe, mentioned postal services. I understand that the Business, Innovation and Skills Select Committee in the other place is conducting an inquiry into the implications of Scottish independence for business, higher education, research and postal services. Undoubtedly the Government will give evidence to that committee.
	With the possible exception of the constitutional issues raised in the comments of my noble friend Lord Mar and Kellie, there was general unanimity across the Chamber about the importance of Scotland as
	part of the United Kingdom. Also mentioned in one or two contributions was that it is important that we are not complacent. I assure your Lordships that the Government are not complacent. Earlier today I heard my right honourable friend the Secretary of State for Scotland refer to the referendum in Quebec. It is difficult to draw too many parallels, but he reflected on the fact that the federalists thought that it was in the bag and won by 1% only. We had the benefit of a lecture in Dover House last month by Monsieur Jean Chrétien, who was Prime Minister of Canada, and we certainly got the message from him. That will keep us on our toes. We know that this is a battle that we must win with both head and heart.

Lord Forsyth of Drumlean: Does my noble and learned friend not think that it is a trifle complacent of the Ministry of Defence, taking up the point made by the noble Lord, Lord West, to say that it is not looking at any contingency plans for the future of Trident, because it takes the view that Scotland is going to remain part of the United Kingdom?

Lord Wallace of Tankerness: My Lords, the Ministry of Defence, as I am sure the noble Lord, Lord West, knows, makes contingencies for many things. As for saying any more on issues of our nuclear deterrent and matters of national security, I am not prepared to go there.
	The noble Lord, Lord McFall, referred to Michael Ignatieff and his point that we can have different identities. There is a British identity, although I appreciate that some, if not all, feel a European identity, and there is a Scottish identity. Having made my adopted home in Orkney for the past 30 years, I can share and feel affinity with that Orcadian heritage. I am sure that the point that was being made was that we do not want to choose between these. What we wish to secure by winning this referendum is that we are not forced to make that choice—something that I reflect on after my noble friend Lord Caithness’s comment as to whether I would have to choose between an Orcadian and Scottish identity and a British identity and affinity. Issues of the heart will be involved, but this debate has focused on the importance of the arguments of the head as well.
	There are important things that we can say. The United Kingdom Government are producing an increasing amount of information, and I will say more about the communication of that later. We know that the United Kingdom is one of the most successful monetary, fiscal and political unions in history. It is a union that has brought economic benefits to all parts of the United Kingdom, because taxation, spending, monetary policy and financial stability policy are co-ordinated across the United Kingdom.
	We know that Scotland and the rest of the UK are economically well placed as members of a single market and a single currency area in the current United Kingdom arrangements. Data published by the Scottish Government suggested that in 2011 nearly 60% of Scottish exports went to the rest of the United Kingdom and that 70% per cent of Scottish imports came from the rest of the United Kingdom. We know that Scottish
	independence would create an international border between Scotland and the rest of the United Kingdom. International experience shows that there is a border effect. It reduces flows of product, money and people.
	We know that the current currency and monetary policy arrangements within the United Kingdom serve Scotland well. Perhaps I can take issue with what my noble friend Lord Caithness said about the First Minister setting out his case very clearly. As my noble friend Lord Forsyth pointed out, within the past five years the Scottish National Party has supported the euro. We were told that sterling was a millstone around Scotland’s neck, but then it supported sterling, either by a currency union or by so-called sterlingisation. Some people in the yes campaign have called for an independent Scottish currency.
	The paper that we produced on the currency identified the four options. First, there is an independent Scottish currency. Secondly, there is the euro. Thirdly, there is a sterlingisation, where the Scots keep sterling but are not part of a formal monetary union. Fourthly, there is formal monetary union. None of these is as successful and workable as having our current arrangements within the United Kingdom. The alternative currency arrangements open to an independent Scotland would be less economically suitable for Scotland and the rest of the UK.
	We know that the Chancellor, when launching the Treasury paper on currency, said:
	“The SNP asserts that it would be in everyone’s interests for an independent Scotland to keep the pound as part of a Eurozone-style sterling zone. … Let’s … look at the evidence… Could a situation where an independent Scotland and the rest of the UK share the pound and the Bank of England be made to work? Frankly, it’s unlikely”.
	While the Scottish Government might like to tell people what they think that they want to hear, we are focused on telling people what the evidence says, what the options are and what the consequences of those options are. You do not have to know too much about economics or look too far to see that the eurozone cannot exactly be described as dream currency union. This was reflected in what my noble friend Lord Maclennan of Rogart said. It was mentioned too by the noble Lord, Lord Hollick, who said that you cannot have monetary union without fiscal union. Countries with the euro are witnessing closer fiscal integration at a time when the Scottish Government would have you believe that you could sign up to a currency union and achieve political and fiscal independence.
	It is not just Scotland’s overall economy and currency that we know about. We know that in Scotland we have a strong and vibrant financial services industry as part of the United Kingdom. Financial services contributed £8.8 billion to the Scottish economy in 2010, more than 8% of Scottish onshore economic activity. The sector directly employs 85,000 people in Scotland and a further 100,000 indirectly, which is around 7% of total Scottish employment. We know that our firms and individuals benefit from a world-leading financial services sector and a large integrated domestic market. Our consumers benefit from the UK’s protection and compensation bodies that are able to pool risk across a large and diverse market.
	Noble Lords who have contributed to the debate have reflected on the fact that the United Kingdom Government came to the rescue when the Royal Bank of Scotland and HBOS experienced their catastrophic difficulties. In evidence to your Lordships’ committee, Mr David Nish, the CEO of Standard Life, said that what he benefited from today was having a single regulator in a geographical area and that he did not think that there was a working model of cross-border regulation that he could find.
	I pick up on the point made by my noble friend Lord Lyell that 70% of pension products bought by Scottish consumers are from firms based in the rest of the United Kingdom, and work by the Institute of Chartered Accountants of Scotland shows that if Scotland were to become independent, the,
	“potential impact on funding requirements for employers operating defined benefit or hybrid schemes across the UK is likely to be substantial”.
	Another important industry for Scotland is oil and gas. My noble friend Lord Shipley and the noble Lords, Lord Lipsey and Lord Hollick, referred to this. They made the point that wherever this valuable resource is, the revenues are volatile and in long-term decline. The UK has a broad and diverse enough economy to be able to absorb this volatility, but it would loom larger in a Scottish economy that would be less able to absorb it. My noble friend Lord Forsyth asserted that the First Minister would clearly want the United Kingdom to bear the decommissioning costs and quoted the Minister who, when asked on 25 April last year whether Scotland would take these costs on, said that the answer was yes. That contrasted with what his Energy Minister, Fergus Ewing, said on 17 April, which was that the UK had a moral and certainly a legal obligation to be responsible for the decommissioning of these rigs. Within a period of 10 days, there had been a diametrically conflicting view of what the position would be on these costs. It is incumbent on the Scottish Government to be a bit more direct in giving answers to these questions.

Lord Forsyth of Drumlean: I apologise for interrupting my noble and learned friend again, but is it not a matter of choice because the decommissioning costs are given by tax relief on the tax revenues? If the oil becomes part of Scotland’s assets, it is not a matter of choice whether it meets the decommissioning costs; they would have to be met because they would be part of the tax regime. Otherwise, it would be too expensive to take the oil out of the ground, in which case the revenue would be zero.

Lord Wallace of Tankerness: My noble friend makes an important point. I am simply pointing out that the Scottish Government do not seem to have worked out which way it is. I am not trying to offload a moral or legal obligation on to the United Kingdom.
	A number of noble Lords, including my noble friend Lord Caithness and the noble Lord, Lord Hollick, mentioned the assets and liabilities. Clearly the division of liabilities and assets would be a significant part of any negotiations to create a new state. In the case of Scotland and the rest of the United Kingdom, it would have to be settled by negotiation. Unpicking the
	United Kingdom’s institutional and governmental infrastructure framework would be a huge task, and it is impossible to say with confidence what the outcome would be. Although there are some general principles of international law that could impact upon this matter, there is no clear set of rules in international practice about the precise allocation of national debt in these circumstances, but there would be an expectation that an independent Scottish state would take on an equitable share of the UK’s national debt. How an equitable share would be calculated is open to question, although I think the Finance Secretary Mr John Swinney accepted that there would be that obligation when he gave evidence to your Lordships’ committee.
	Europe and Scotland’s place in Europe also featured in the report and in our debate. Again, we know that if Scotland leaves this union, the rest of the United Kingdom would be a continuator state. That was set out very clearly in the first Scotland analysis paper that we produced. The United Kingdom as a continuing state would maintain the same set of terms and conditions, rights and responsibilities that we enjoy today in Europe, NATO and the G8. Scotland would be a new state and would have to seek to join all those international bodies. That is a fact that the Scottish Government initially sought to deny. With regard to Europe, they said it would be seamless, automatic membership. Now, in the face of the evidence, they publicly accept that they would have to negotiate their way in. We could debate this. There are differing views about how that negotiation would take place, but there can be no doubt that it would be a very difficult negotiation. As the noble Lord, Lord McFall, pointed out, there would be no guarantee of an exemption from euro membership, or from Schengen, as the noble Lord, Lord Kerr of Kinlochard, stated. My noble friend Lord Caithness asked about the share of the rebate. It is impossible to say what the share of the rebate would be or whether the European Union would even grant any rebate to the Scottish Government. It would be a matter of negotiation not with the United Kingdom Government, although as a member state we would have a part to play in it but, after the accession of Croatia next week, with 27 other Governments, and there is no guarantee about the outcome of such negotiations.
	Defence was quite properly raised by a number of noble Lords. In our responses to other Select Committees we have sought to give some indication of the number of defence-related jobs in Scotland. How many would be lost would to some extent depend on the configuration of Scottish defence. My noble friend Lord Shipley mentioned the report this week from the Scotland Institute which did not really offer much about what the profile of Scottish Armed Forces would be. As at 1 April 2103, there were more than 11,000 Regular Armed Forces and 4,000 Ministry of Defence civilian personnel in around 50 sites throughout the country. Following the Defence Secretary’s announcement on 5 March about the Army basing plan, by 2020, there will be some 12,500 Regular Armed Forces based here and Scotland will be home to all the Royal Navy’s submarines, one of the Army’s seven adaptable force brigades and one of the three RAF fast jet main operating bases.
	With regard to civilian defence jobs, the Scottish Government’s agency Scottish Development International estimates that the defence sector in Scotland employs more than 12,600 people. The building of the Queen Elizabeth class carriers, initially on the Clyde and with further construction in Rosyth, underlines the commitment to defence jobs in Scotland. We can confidently say that that could not by any stretch of the imagination be maintained at that level in an independent Scotland.
	I recognise that calls for more information have come in this debate. We are committed to setting out facts and evidence to ensure that people take an informed decision. I take the point that we, not just as a Government, but all of us who support the union, have an obligation to go out and sell the message. It may be that these weighty tomes are a bit weighty for leaflets or for a snappy column in some of our newspapers. Certainly, that has been represented to us, and the tenor of some of the contributions to this debate was that we should think of ways in which we can put out a more popular version. We are aware that these requests have been made, and we will give consideration to that.
	Ministers have a particular responsibility, but others can get out and talk. On Friday, I will be speaking to the Scottish Council for Development and Industry in Aberdeen on constitutional issues. I know when my right honourable friend the Secretary of State for Scotland saw the report about the Scottish Chambers of Commerce and those who did not think that they were informed enough, he said—he will probably not like me for this—that he would be happy to go to talk to some of the chambers of commerce up and down Scotland. If anyone is listening from the various component parts of what I think is a federation of SCCs, there is an opportunity there to invite the Secretary of State for Scotland, but others of us would be willing to do so.
	I heard the request that we should engage in pre-negotiation. I am not going to side-step it, and I know it will be a disappointment to my noble friend Lord MacGregor, but the United Kingdom Government have made it clear that we are not going to enter into pre-negotiations. My noble friend Lord Caithness said that the First Minister had said that we should. In fact, in a letter to my right honourable friend the Deputy Prime Minister, the Deputy First Minister said:
	“The Scottish Government has not asked you to pre-empt the referendum vote in that way. Indeed, I was clear in my speech at Strathclyde University on 3 December that ‘independence negotiations [... ] will follow a yes vote’”.
	There are a number of reasons for this. Many people in your Lordships’ House are involved in business, and I do not know how many of them would go into a negotiation showing their negotiating hand and their red lines. Perhaps more fundamentally than that, I belong to a Government who represent the whole of the United Kingdom. If we were to have that kind of pre-negotiation, I suspect it would not be possible for my right honourable friend the Chief Secretary to be part of it because, in the event of independence, he would have a different standpoint. He is a Scot. You would then have part of the United Kingdom Government perhaps debating against another part. My noble friend Lord Caithness might expect me, as someone who is
	resident in Orkney, to have an interest in that too, and I might not be able to take part either. I cannot think of anything that would better suit the argument of those who want to break up the United Kingdom than that those who want to maintain the United Kingdom spend the next 15 months arguing with each other about what the negotiating position would be. This Government believe in a United Kingdom. If there are negotiations post a referendum, someone will need to represent the interests of England, Wales and Northern Ireland, but that cannot happen before the referendum. We believe in the integrity of the United Kingdom, and once you start unstitching the threads of the United Kingdom by that kind of approach, I fear that we would be in a very difficult position indeed.
	When my noble friend Lord Forsyth was quoting the First Minister quoting Robert Burns, I sent a note to the Box asking for the words of a poem that starts:
	“Does Haughty Gaul Invasion Threat”.
	The Box came back with the verse:
	“Be Britain still to Britain true,
	Amang ourselves united;
	For never but by British hands
	Maun British wrangs be righted!”.
	I got the words from the Box, but my noble friend quoted the poem by himself. There is so much truth in it. If we want to put out a very clear position, there is a way in which people in Scotland can have the same currency as people in the rest of the United Kingdom, the same financial regulations, the same passports, the Bank of England as lender of last resort, the same welfare provisions and the BBC. It is called the United Kingdom, and I hope people will vote for the United Kingdom on 18 September next year.

Lord MacGregor of Pulham Market: My Lords, I was very grateful to my noble and learned friend for not including me among the English when he made his opening remarks. I was born, brought up and educated in Scotland, but I have spent nearly all my political life in England and have been proud to represent an English constituency, so I hope I can see both sides of the argument.
	As we were debating this issue today, I was reflecting on the fact that we set up our committee in February 2012. We are now halfway towards the vote, and so many of the issues that we debated today are clearly not understood by the electorate outside in either Scotland or England in the way that we have understood them today. I take comfort from the fact that our report has identified very nearly all the key economic issues on which Scottish voters will have to make up their minds before—or when—they vote. I do not yet take comfort from the fact that, certainly among English voters, they still do not realise that there are many issues that will have great implications for them in terms of a Scottish vote. I will come back to that in a moment. I also do not take comfort in the fact that so much more effort still needs to be made to make the voters of Scotland aware of the many implications there will be for them when they vote.
	I take comfort from the very robust reply that my noble and learned friend has made. It is quite clear on where he stands on most of these issues, and clearly he will put that case across. I also welcome the fact that we will have more of these lengthy but very helpful analyses from the UK Government. These are all good issues. I slightly differ from him in that I think that English electors need to be made much more aware of the implications for them, and ensure that the UK Government protect them from the serious consequences in relation to defence, currency and the many other issues that we have identified today. That awareness does not yet exist among people in the rest of the UK. I understand his point about not entering into pre-negotiations, but there is a difference between that and identifying the issues that will be crucial for the rest of the UK if the Scots vote for independence. That is what I and my committee are calling for. That is what we meant by the red lines—they are the key issues that affect the rest of the UK.
	I welcome the extra papers. This has been a most helpful debate. There has been a large measure of agreement among all of us, who are from all parts of the UK, on the issues that are so important and need to be resolved, and on the need for awareness in Scotland of these issues before they vote. As I said, my noble friend’s wind-up speech has been very helpful in relation to that. I thank all Members who have taken part, in particular the members of my committee for the huge amount of work that they did on this issue. We will continue to take an interest.
	Motion agreed.

Small and Medium-Sized Enterprises

Small and Medium Sized Enterprises

Motion to Take Note

Moved by Lord Cope of Berkeley
	That this House takes note of the Report of the Select Committee on Small and Medium Sized Enterprises (Session 2012-13, HL Paper 131).

Lord Popat: My Lords, there are 14 speakers in this debate. If Back-Bench speeches were kept to a maximum of eight minutes, with 10 minutes each for my noble friends Lord Cope and Lord Green, we can expect to conclude this debate just before 9 pm.

Lord Cope of Berkeley: My Lords, I was delighted to be appointed to this Select Committee and honoured to chair it. I have long thought and argued that SMEs—small and medium-sized enterprises—are the single most important variable in whether our economy is successful, and that the Government have a duty to do what they can to help them succeed.
	Economists argue, particularly on days like today, about what the Chancellor of the Exchequer and the Governor of the Bank of England should do. That is interesting but not the real clue to whether our grandchildren will live in prosperous times. I am an accountant and have seen some companies falter and others flourish because of the enterprise, long-sighted decisions and flair of the people who run them. These days, it is no easy task to run an SME at a sustained
	profit. Regulations of every kind stand around you to prevent you doing the wrong thing. However, a positive attitude matters—spotting the opportunities and making the right decisions on time. If we can get the climate for SMEs right, if our entrepreneurs are motivated and successful and if sufficient of our young people have the optimism to take responsibility for their own future and for employing others, we will prosper as a nation. If we value our SMEs, we lay the foundations of the future. In particular, if our SMEs can export, we can thrive in world markets and pay our way in a vastly changing world.
	Our committee was set up to see if government could help more. The initiative came from my noble friend Lord Popat, and we are grateful to him for that. He served on our committee until he was—as one can see—rightly appointed to the Government. The noble Lord, Lord Mitchell, was also promoted to the opposition Front Bench from among our ranks. The committee members have proved to have huge practical experience in running businesses of very varied kinds. Two of our members have apologised to me for not coming today because of board meetings that they have to attend.
	Personally, I found serving on the committee most encouraging. Wherever we went—we travelled widely across the UK and a bit in Europe, too—we met vigorous businesses, many of which were taking advantage of the Government’s various programmes of assistance and finding them valuable. In south Wales, Concrete Canvas impregnates fabric with cement so that one can line a ditch or erect a hut with fabric that turns into concrete when you wet it. It is selling that all over the place, including to the MoD for use in Afghanistan. Viv Parry from Leeds opened up a market in New York for her Exquisite Handmade Cakes, although she was allowed to take over only a sample of the tin she sells them in, not the cakes. Noble Lords will understand that they are food products. Who would have thought a few years ago that a combination of plasticine models and sheer wit would give rise to Aardman Animations, which we met in Bristol and which sells all over the world, including in China? We give other examples in our report. We had to pick only a few and I have picked those, which is unfair. However, I wished to give some examples.
	There is a whole series of ways in which UK Trade & Investment—UKTI—and other government agencies help SMEs, both directly and, most importantly, through local enterprise partnerships, chambers of commerce and so on. Our message to SMEs, if there is a single message, is, “If you have a problem, share it. Don’t be frightened of the undoubted complexities of exporting. Take them on and get advice”. Our main criticism of UKTI was not the services it delivers but the fact that it is too little known and therefore too little used. In the case of UK Export Finance, the very low take-up of its programmes shocked us, and very little use is made in the United Kingdom of the European Investment Bank facilities to support SMEs.
	There is no doubt that availability of finance is a most serious problem for SMEs, as your Lordships’ House discussed again only yesterday. The large clearing banks did their best to reassure us. However, as we went round we heard constant criticism of their distant,
	formulaic and sometimes slow decision-making processes, which inhibit the ability of SMEs to borrow from them. We also heard of other options for funding, which are available and growing. The Government’s agencies, including UKEF, the coming business bank, Funding for Lending and the new regional export finance advisers are addressing the problem. We shall see in the next few years how successful this proves to be.
	In the time available I will mention briefly three of the other specific areas that concerned us: languages, intellectual property and the Bribery Act. Languages are important in exporting. As we all know, English is very widely spoken in the world and for that reason we are not good at speaking other languages. Some businesses in very expert sectors said that they needed no other language. Clearly, however, in most sectors people prefer to buy from someone who speaks their own language. We drew attention in our report to the fact that these days the United Kingdom has a high degree of linguistic diversity as a result of immigration. We should use that fact more to help exports. I also think that more careful thought about how languages are taught could prove valuable.
	Intellectual property protection is ever more important as the world gets smaller. The Government have been negotiating hard internationally and stepping up their ability to advise firms on the risks and what to do about them. It is most important to keep up this work.
	The vagueness of the Bribery Act 2010 also proved a controversial issue. In the two years since it came into force, there have been no prosecutions, but it has caused constant worry to exporters about just what is permissible. We want more clarity about all this and suggested post-legislative scrutiny to find out what the authorities and others concerned think the Act means and promulgate it more widely. The Government’s attitude, shared, it seems, by the House of Commons Justice Committee, is that until the courts have pronounced, there is no value in having post-legislative scrutiny. In other words, we have to wait until some particular businessmen are selected to spend months and no doubt much money being dragged through the courts over some practice deemed doubtful in this country, but normal in the country in which they were trying to sell. Meanwhile, everyone concerned becomes thoroughly inhibited when selling in some markets by comparison with their competitors.
	It has been an interesting time for me and I want to thank all my colleagues on the committee for their very positive and supportive approach. We had first-class help from our clerks, firmly led by Christine Salmon Percival, even after an accident from her sick bed. The noble Baroness, Lady Cohen, did the same, when she, too, suffered in the snow and ice. We had an excellent adviser in Professor Robert Blackburn of Kingston University, one of the most entrepreneurial universities in the land. By the way, in case any noble Lords read the small print in some of the Sunday papers, I should make it clear that they advised me as chairman what I might say, as you would expect, but I chose what to say and bear sole responsibility for my words. Our committee was also assisted by the positive attitude to our work of my noble friend Lord Green and his colleagues.
	We were an ad hoc committee, which means, of course, a temporary one. Our collective work as a committee is finished, but the Government’s work goes on. It is urgent but long-term, and given the importance of SMEs, I think our most important recommendation was Recommendation 1—that the Government should report back, not only now, but in a year’s time. I am delighted that the Government have committed themselves to do this in 2014 and 2015. We are promised further debates then. In that way, I hope, the work of our committee will live on. Meanwhile, I commend the report to the House.

Lord Haskel: My Lords, rebalancing the economy is in favour all round the House and rebalancing means a move away from consumer spending and a rising housing market fuelled by debt towards producing and selling more goods and services through investment. It particularly means selling overseas so that we can cut our current account trade deficit and cut it by encouraging SMEs to export.
	During my business life, part of my activity was exporting, so I was delighted to serve on this topical committee; a committee so ably led by the noble Lord, Lord Cope, so ably advised by Professor Blackburn and so conscientiously served by staff led by Christine Salmon Percival. We are fortunate to have such an able and versatile staff. To my knowledge, Christine Salmon Percival has been clerk to a committee reporting on science and technology; a committee reporting on legal and constitutional matters; and a committee reporting on the economy—now that is versatility.
	We started our inquiry by taking evidence from BIS. It soon became obvious that it was in the process of setting itself up, of putting into practice, its plans to encourage SMEs to export. The Government’s response tells us that UKTI continues to hire more staff. The Chancellor in his Autumn Statement provided additional funds for support in the next two financial years. We are also told that there are plans to use a number of websites to bring existing and future services of UKTI to the attention of business; services for contacts, for mentoring and for other practical help. All this confirms the importance the Government attach to encouraging SMEs to export and it is very welcome, as are the Minister’s efforts, because I know he travels around a lot.
	However, it has to be put into practice. The noble Lord, Lord Cope, told us that our inquiries indicated that many SMEs are not aware that all these services are available. We would like business intermediaries, professional advisers, LEPs, chambers of commerce and all the professional organisations also to convey the message. The Government's response agrees with this and I think this is beginning to happen. I do not know whether the Minister went to the BIS open event in the Jubilee Room last Wednesday, but we were told that the Government’s commitments are to do more of the same. It was a very good demonstration of what the Government are proposing to do.
	Is it working? Figures published last week show that the value of exports has fallen by 1.3% in the past quarter. The CBI describes these trade figures as
	“unsatisfactory” and comments that the Government need to do more to help to raise exports to the fast-growing economies. Is there anything more or anything different that can be done?
	Did the Minister hear the maiden speech of the noble Baroness, Lady Lane-Fox? She is working with the Cabinet Office to help us make the most of digital technology in communications. She said:
	“British businesses also need support, as has been mentioned here already, and small and medium-sized business in particular. We know that only 30% of them are able effectively to use online tools, and that there is a potential £18 billion in the economy if we are able to give them more advanced skills to sell and buy online”.—[Official Report, 13/5/13; col. 160.]
	If 70% of SMEs do not have the IT skills to use online tools, maybe UKTI should be working with the Cabinet Office and the noble Baroness to train UK small and medium-sized businesses to use these tools—a bit of joined-up government perhaps?
	On 13 June, at col. 1716 of Hansard, the Minister’s noble friend Lord Howell of Guildford argued that trade is operating in a completely different way and that the world's largest single market is now the cybermarket on the world wide web. Are the Government listening to their friends and advisers? What is being done to give SMEs these more advanced skills to help convert them into exporters?
	The world of business is changing in other ways. There are other ways of exporting which may be more suited to particular companies or markets or products. Franchising, licensing the product, licensing the know-how, the patent, the trademark—is UKTI helping with this? There was very little evidence of this. Perhaps another way is for UKTI to be more selective and to try to nurture new export sectors—those sectors where the UK has a competitive advantage. Last November the Chancellor, in his address to the Royal Society, listed eight such sectors that would receive special encouragement and money. Again, a bit of joined-up government could make UKTI part of this arrangement by encouraging the SMEs in these sectors to export.
	Our report and the noble Lord, Lord Cope, spoke of the problems that SMEs have in getting export finance. We learnt of one solution during our visit to Bavaria. Incidentally, the single state of Bavaria exports to the United Kingdom more in value than the whole of the United Kingdom exports to Germany. For 60 years, it has had its own local state-backed investment bank, which makes export finance one of its priorities. Surely this must be one of the reasons for its success. What is happening to our Government’s business bank, and will it be as local as the noble Lord, Lord Heseltine, would obviously like it to be? In fact, aiding and encouraging local firms to export could well be part of the Heseltine proposals to localise business services by government. However, today’s Statement is not very encouraging about that.
	We know from our inquiry—and the noble Lord, Lord Cope, reminded us—that it is not easy for small companies to export. There is the inconvenience, the time, the expense and the preparation. Time and again we were told that the most important thing is for people to have the get up and go—the will and the initiative—to do it. In small and medium-sized companies, exporting often depends on the personality of just one
	or two people, irrespective of the benefits and financial rewards that exporting brings to the business. So how do you identify these people and these companies? There is a supplement in today’s
	Financial Times
	telling us how. Firms using big data identify a potential customer for their style of clothing or people who like a particular kind of holiday or food. Could not UKTI write an algorithm that would identify from big data potential exporters among the SME community? That would be a wonderful cost-cutter.
	The point I am trying to make is that the objective of inquiries such as this is not criticism by political point-scoring; it is to question the policy, to question the strategy and to question what is being done.
	I think that we all welcome the enthusiasm and energy that UKTI is putting into the work, but the Government’s response seems to say, “Yes, we agree with your analysis. Thank you for your recommendations but we are going on as we are”. I found that rather disappointing because there is obviously more that can be done to achieve what we all seek, which is to rebalance the economy.

Baroness Coussins: My Lords, I want to comment specifically on Chapter 6 of the report, which deals with the topic of languages and culture. I declare interests as vice-president of the Chartered Institute of Linguists and as chair of the All-Party Parliamentary Group on Modern Languages, on whose behalf I submitted evidence to the Select Committee.
	I congratulate the Select Committee on taking language skills seriously as a mainstream issue. This makes a very welcome change from the approach that we often see, which is either to overlook language skills or, at best, to mention them as a footnote. However, since the report’s publication, two new authoritative pieces of research have been published—a new report from the British Academy and another, only two weeks ago, from the British Chambers of Commerce. I think that if the committee had had the benefit of these two latest studies, its recommendations might have been even stronger and had a slightly different focus. The Government, of course, do have this advantage, so I hope that in his reply the Minister will comment on how they might update their response to the recommendations on languages in the added light of the recent findings.
	It was disappointing that the committee received mixed evidence on the importance of foreign languages and that in some sections of British business there is still an outdated belief that English, vital thought it is, is enough. The latest British Academy report shows how ingrained monolingual attitudes are not only harming the export potential of current businesses but standing in the way of developing a strong supply of language skills for the next generation by preventing successful functioning of the market for language skills.
	It is true that some surveys show very small numbers of firms identifying languages as a barrier to export growth. However, the British Academy points out that discrepancies in findings can be accounted for by differences in the sample and profile of respondents, whereas in Kingston University’s more focused study
	of SMEs’ approach to doing business overseas,
	The 
	eXport
	 Factor
	, issues relating to language and foreign cultures were seen as the biggest barrier of all, cited by 31% of SMEs.
	The recent report from the British Chambers of Commerce showed that the proportion of non-exporters who would like to trade internationally has risen slightly even since the Select Committee’s deliberations. Its latest survey covered 4,500 businesses, more than 90% of them employing fewer than 250 people and three-quarters fewer than 50. The BCC calls the extent of the language deficit “sobering”, pointing out that 70% of respondents had no foreign language ability for the markets they served, and that the deficit is greatest in the fastest-growing markets. For example, only 0.5% had any ability in Russian or Chinese. With the importance of market growth in Latin America, it is equally shocking to me that 64% speak no Spanish, never mind Portuguese.
	The impact of this on the bottom line of business, and therefore on the UK’s economy and competitiveness, is plain and was clearly recognised by the Select Committee. The UK could be missing out each year on contracts worth between £9 billion and £21 billion, whereas firms that proactively use their language skills and the cultural knowledge that goes with them achieve on average 45% extra sales.
	The report acknowledges the weakness in the argument that English is enough because it is the universal language of business, pointing out that only 6% of the world’s population consists of native English speakers. Even the dominance of English on the internet is declining. In the past decade, the report tells us that web content in English has increased by 300% but that content in Chinese has gone up by 1,500%, in Russian by 1,800% and in Arabic by 2,500%.
	There is also a circularity in the argument that English is enough because, as the report points out, UK companies tend to trade only or mainly with other English-speaking markets. Therefore, the lack of language skills is self-limiting and constraining. We are cutting ourselves off from opportunities for growth by being blind to the languages barrier.
	A perfect example of that is the languages industry itself. This sector includes interpreting, translating, language-teaching tools such as text books, CDs and online resources, subtitling, dubbing, web localisation and much more. In 2009, the EU published the first ever study of the size of the language industry, estimating its value at €8.4 billion and on target to double to €16.5 billion by 2015. The study makes recommendations to help businesses to seize the opportunities to benefit from multilingual competence. SMEs in particular are advised, for example, against assuming that localising a website into the language of a target market is enough to generate sales, and EU member states are urged to introduce compatible statistical measures to help foreign language planning. I should like to ask the Minister whether this particular recommendation is what the Government had in mind when they said on page 9 of their response to the Select Committee report that they were developing a metric to quantify the problem. Can the Minister say what that metric might be?
	I should also like the Minister to comment further on the recommendation that UKTI should make a priority of dispelling misperceptions to do with language difficulty and help SMEs to deal with the problem. I find this recommendation a little unsettling because it is not clear to me whether the committee regards the employment of native speakers and outsourced translation services as the best strategies. I would be concerned if it were or indeed if that were the opinion of the Government. The report overstates what can be done with technology and native speakers and is not quite strong enough on the importance of developing the UK’s own capacity on languages. Every native speaker employed for their language skills acts as a disincentive for UK nationals to develop their own.
	The committee indicated just how bad the UK is in comparison to its EU partners. It is pretty much bottom of or worst at every type of language skill you can measure. The take-up of languages at GCSE has halved since they were made optional after the age of 14 in 2004. The boost provided by the introduction of the EBacc seems already to have run its course, with last year’s take up showing no increase over the previous year’s. Although I am in strong agreement with the Select Committee in welcoming the Government’s move to make languages compulsory in primary schools from 2014, this will certainly not be enough on its own to redress the country’s language deficit.
	The languages taught in schools do not necessarily match the ones business says it most needs, nor do they build on the existing linguistic diversity of many pupils. Added to which, as the report says, we need a cultural shift in attitudes within businesses, too. The British Academy says businesses underestimate their current and future needs and do not invest enough in the training and management of language skills. In the light of such enormous opportunities for growth if only SMEs could scale up their language skills, can the Minister say why the Government will not consider introducing financial incentives for such training as proposed by the British Chambers of Commerce? I acknowledge the wide range of support services available through UKTI should companies know about them and have the good sense to choose to access them. However, it seems to me that something more proactive and innovative is needed if our SMEs are to seize their fair share of global growth in a sustainable way and not just adopt a quick fix approach to the language deficit.

Lord Selsdon: My Lords, forgive me, I was just trying to work out how many members of the committee were speaking today. I know that they will all be the best informed and that those like me will have relatively little information or knowledge.
	I am extraordinarily impressed by the change that has taken place, probably over the past 12 months, in the attitude of the UKTI and the public sector to the promotion and development of trade. I wonder why my noble friend Lord Green has decided to leave a ship that is not sinking. I pay tribute to him because of this change of attitude.
	I started my life in industry in the asbestos industry, working in new products called plastics. I suddenly thought I was in the wrong business, tried to get another job and ended up doing market research. My two greatest clients were the Government of Japan, through JETRO, and the Government of India. For several years we looked at what they could sell abroad and at the marketing and never realised that India and Japan would be two of the biggest investors in the United Kingdom. We probably never dreamed that our automotive industry would be saved by Indian investment.
	I want now to look a little into the balance of trade. We suffer from a major deficit on manufacturing and always have done. I declare my interest in that my great uncle Stafford Cripps was president of the Board of Trade and drew attention to those problems. Every time I have spoken here I have drawn attention to it. Does it matter that we have a deficit on manufacturing if we have a surplus somewhere else? We have to accept that the balance of payments deficit on manufacturing is going to continue for quite a long time. Whether it will be supported by a surplus from the financial institutions, which are under quite an aggressive attack at the moment, is another matter.
	We are left with the initiatives that can be taken. I was on the British Overseas Trade Board, I chaired the Middle East trade committee—I was on all these things. I used to go to the DTI practically weekly. I could not understand why suddenly at a stroke one of the previous Governments got rid of the British Overseas Trade Board and all the advisory bodies related to the promotion and development of trade. Suddenly they were replaced by a lot of new advisers, many of whom did not necessarily know the country they were going to deal with. Hundreds of them were being appointed, but the Government forgot that in the days of the BOTB the area advisory groups had, free of charge for the Government, advisers who worked on the ground in all the countries. My own responsibilities lay particularly with the Middle East and with Africa. I was told, “My dear chap, you are young enough to be alive when something important happens, but it is going to take a long time”. Now when we look at our balance of payments, we do not seem to be worried.
	Occasionally I get asked to start things. I started something recently and I went into the UKTI for the first time. The biggest problem was that it could not get a room to fit enough of us in. It was busy and humming and someone had the decency to think that I looked prosperous and tried to sell me the helicopter in the entrance. A new attitude has come out of all this that I find stimulating and far from worrying.
	I look back to the small and medium-sized enterprises. I do not know why we call them SMEs; I just call them people. We want people who will take the initiative. The term entrepreneur used to be used. I used to use that term until I was told—the noble Baroness, Lady Coussins, could probably help—to try to translate it back into English. If you do that it becomes “undertaker” —someone who undertakes things. Translate that back into French and it becomes croque-mort, which is a different form of undertaker. The English language makes life fun. Here we have SMEs. Why do the
	Government want to have initials? Have you ever tried to pronounce UKTI in different languages? It is not possible. No one can understand what you are talking about. The same is true for SMEs; it is a girl’s name in one of the countries, I have forgotten which. Why have we suddenly dropped the word “trade”?
	The small entrepreneurial business, as it may be called, was always the lifeblood of the United Kingdom historically. Someone would go off abroad, find an opportunity, come back and try to demonstrate it. He might even have bought himself a new briefcase to look more important or invented a nice name. I have always enjoyed and loved the sole trader. The balance of payments deficit on manufacturing now is desperate with every country, except for what we used to call the countries of the third world, which is now known as the emerging markets. They always used to be great markets for the United Kingdom. My grandfather when he was in trade—he was on the Board of Trade at one time—would trade with Mongolia, the West Indies and Latin America, which seem to have been rediscovered. Why did we suddenly change all these names? Why can we not go back to trade?
	It is quite intriguing too when we ask for money. Most of the banks these days recognise that if they finance trade projects they get a very large fee, and if you are providing export credit you have the United Kingdom state guarantee and can make a 1.5% margin virtually risk free. These are the sorts of incentives that encourage the financial sector to look for trading opportunities.
	When our original empire—if that is what it may be called—started, it was based on technology, engineering, building railways, building bridges and providing connections. Now we move into the strange new electronic world, which is perhaps beyond my own pay grade. Anyone starting a business now has to realise that they do not have to leave their office to be able to communicate worldwide. They do not necessarily have to travel. I keep saying to people, “Do not travel there. First, send an invitation asking them to come and see you”. An awful lot of people from all around the world want an invitation to come to London or to the United Kingdom. You find people who are looking for clients and invite them over here. They come on holidays. The relationships get built, and while we may criticise ourselves for being a multicultural society, if that is what it is, it is what we always were in the days of the British Empire when it developed and was built.
	I end with a point not just about the size of our small country but about the influence that stems from the Commonwealth and others. It is a little bit of fun being treasurer of the House of Lords Yacht Club. We do not have much money. I sat down one day to look at where our influence lay. I have raised this in the House before. I looked at economic exclusion zones. There is a 200-nautical mile limit that goes around your own country. The region around the Commonwealth and our own territories accounts for 60% of the entire EEZs of the world. The French have another 15%. If we got together with the French, we would have 75% of the 200-mile limits. The resources and all the developments are there.
	We are a maritime nation. We were entrepreneurs or “undertakers” and now we are small businesses, which are the ones that will grow. I so enjoy it when a man comes into my office to see me, I say, “What are you doing?”, and he says, “I have just started my business. I am moonlighting at the moment. I hope I can make it work so that I can leave my boring job in a rather big organisation”. The enthusiasm is there. I congratulate the Government on this change of attitude within UKTI, and I hope that it continues.

Baroness Cohen of Pimlico: My Lords, I would also like to thank the chairman of this committee, who has paid such graceful compliments to me and to the clerk. It must have been pretty discouraging for the chairman to have his treasured clerk and a senior member of the committee both flat on their backs sending him comments on the report from hospital on mobile phones. I commend him for staying steady through that.
	I formally declare my interest as a director of the London Stock Exchange, a facilitator of equity for small and medium-sized companies and, no doubt any day now, a facilitator of raising equity for banks—several of them.
	I should like to talk about one of the missing links in all this, which is the shortage of actual bank lending for small and medium-sized companies. The committee’s subtitle was Roads to Success: SME exports—Select Committee on Small and Medium Sized Enterprises. However, as a witness from one of the big banks observed, the companies best equipped to export were those that were well managed, profitable and solidly financed—qualities that you would want in any company, but even more so in a small company launching itself on the less predictable and more difficult field of exporting, particularly exporting outside the EU.
	So far, so reasonable and I am sure that we can all agree about the need for well managed and well financed companies. But what part are the big commercial banks —RBS, Lloyds, HSBC and Barclays—playing in the financing of SMEs? Our report identified major discrepancies between the banks’ fair words about lending to SMEs and what the SMEs’ experience had been. I quote the report:
	“Few SMEs had a kind word to say about banks”.
	No, indeed, they noted that lending, even to SMEs with full order books, strong collateral and strong cash flow, had dried up. Onerous guarantees were being demanded, including that directors put their houses up as security, which is lazy banking.
	Most of my colleagues on the committee and I were, on the whole, inclined to believe the SMEs’ account of the relationship. Our own experience as well as external facts support the SMEs’ views on the matter. Even the Secretary of State for Business, Innovation and Skills described the banks as having had a collective nervous breakdown in the financial crisis. If they had had several different nervous breakdowns it might have worked better, but they had exactly the same one. It involved reacting identically by cutting their costs—to be fair, in the only way that a bank can cut its costs quickly—by making savage redundancies, drawing in regional networks and sucking all the
	power back to the centre. That leaves authority and a great deal of regional expertise vested in people who do not know their customers and whose authority in many cases is limited to a lending power of something like £50,000, which does not get you very far.
	It was also clear—to us, at least—that a good many managers were simply terrified to lend except on a rock-solid covenant. They are petrified of making the bank’s position worse. They wish only to do their best for head office and to follow its agenda of getting rid of any loan or customer viewed as even slightly doubtful, and of raising the prices being charged to less doubtful customers. UKTI, we began to observe, was beginning to perform a secondary and very useful role of wandering around finding bank financing for people. That is interesting, but not what it was set up to do.
	The banks, of course, are not doing this for fun or all of their own volition. In the valedictions given to Stephen Hester, the retiring—I suppose we are calling it that—CEO of RBS, the Government’s agenda is clear. He was praised for cutting costs, for terminating less than solid lending and for getting more profit from his better lenders. That is commendable if you are, as he was, trying to save a bank and return it to profitability. However, it is absolutely not useful if you want to coax small and medium companies to grow and prosper.
	In all this, as in other matters, all the big banks, including those that the taxpayer does not largely own, have been doing the same painfully pro-cyclical things, such as cutting down on regional staff and centralising and standardising their procedures to the point where it is doubtful that the Archangel Gabriel and staff would have got a loan, at least if they applied in Hull or in Liverpool, even with a personal guarantee.
	Again, much of this has been at the Government’s behest. If you demand that very large amounts of regulatory capital be held against business lending, banks will seek activity where less capital is required, such as investment management, as UBS did, or safe-as-houses, low loan-to-value mortgages, which is where many banks are going.
	The banks are not only swinging in line behind the Government’s and the regulator’s wishes but adding a few refinements of their own, such as seeking personal guarantees to support lending and charges on directors’ own houses. Nothing more inhibiting to enterprise could be managed and the worst of it is that they all do the same thing.
	What we need is either a radical change sparked by the Government—who else?—or a new banking system. So far, the Government’s offer has consisted of exhortation, which is never useful in my experience, an embryo bank, which may well be useful but we do not know yet, and the Funding for Lending scheme. This fund would be fine if it is not also hypothecated on lending on housing. It is pretty clear that the bulk of this cash will inevitably go to mortgage lending. It is easy, can be secured on bricks and mortar and you get the equivalent of a personal guarantee with it because there is a person living in the bricks and mortar who really wants to hang on to it. I think an anxious bank
	manager struggling to do safe profitable lending for his employer would much prefer mortgage lending to business lending to SMEs; why would they not?
	The signs of a new and more useful banking system—more innovative and differentiated—are beginning to appear but they are small and delicate. I hope that the business bank announced by the Government will be useful, but it is far too soon to tell. There are other hopeful but small and new organisations such as the Funding Circle and experiments in crowd funding. We also heard from Bibby Financial Services, which took an amazingly robust view of its ability to get good loans for its customers from some of the 600 foreign banks with branches in this country. Those are all useful, but none will secure enough lending for serious growth any time soon. For that, you need your country’s big commercial banks back in business, spreading out again into the regions and no longer terrorised by their recent history or some ill considered regulation.
	Meanwhile, it is to be hoped that more equity funding will fill at least some of the gap. Very few companies get by without any equity base and in these hard times companies are looking to equity to fill some of the void left where bank lending should be. I commend a couple of government schemes—the Enterprise Investment Scheme and the small companies investment scheme. They enable high taxpayers to invest up to £100,000 per annum more or less free of tax and have been the foundation of a lot of start-up companies. Again, this is not the revolution, but it is a help.
	That help is much needed. We heard, discouragingly, that other private sector sources of venture capital have slumped to the point where about 60% of venture capital raised last year came from government sources as opposed to about 10% from government sources in 2007. I would guess that we were no more than holding our own in raising private sector venture capital for privately held SMEs.
	The equity story gets better as you approach the public markets. I am a director of the London Stock Exchange and, as such, responsible for the AIM market. If a company is big enough to get on to AIM, it typically increases its turnover by 37% and employment by 20% in the first year after admission to the market. There are other important advantages to do with visibility which make growth and exporting easier for SMEs. Wearyingly, it is also true that it is much easier to get a bank loan if you are a publicly quoted company.
	Equity can never be the whole story. Entrepreneurs, the life-blood of the SMEs, are often very unwilling to give away as much equity as present-day conditions require. I suspect they are, like all of us, waiting for things to get better before they try to raise money. On present form, we could be waiting some time and that is a tragedy for the people we met in the regions and for many others who could expect to be cheerfully and gainfully employed. We need our big banks now, not cowering behind the barricades of the regulators in London. They all need to get out more.

Lord Teverson: My Lords, I briefly declare an interest as a director of three SMEs.
	Every week when I come to this House and join your Lordships, I leave home and come to a different atmosphere, but until last year I had never been tempted to go speed-dating to fill up my time. However, last year I was, and I took a trip down the M4 to a speed-dating service in Bristol, organised by UKTI, as a member of one of the companies that I am associated with. I went to a hotel where there were some 40 advisors from different nations, right across the globe. I spoke to people from Austria, the Netherlands, Ethiopia and Argentina. There was a fantastic variety; some of them were Brits who were based in embassies, but many were foreign nationals based in our embassies—and it was really exciting. The noble Lord, Lord Selsdon, has mentioned some of these occasions. We spoke to around 10 of these advisors; it was very well organised, and we have followed some of those up. I will come back to that later.
	I congratulate UKTI on that experience. The great thing about the Passport to Export programme was that it had a good balance to it, and it gave you opportunities as you went through it—not completely at the taxpayer’s expense. You had to contribute to it yourself, so you took some responsibility for the outcomes. You met other people in different sectors who had gone through those experiences before, so you learnt and found out about the export business. Information barriers and risks were explained and taken away, so you had a much better ease into that market. This is all essential for smaller companies and organisations.
	At that time, I was also a member of a Local Enterprise Partnership in the south-west. Some research done on behalf of LEPs more broadly was very factual and pointed; in reality, the factors which determined whether an SME was a good exporter were whether it invested sufficiently in research and development, and whether its products and staff were knowledge-led. It helped if it was in a cluster of businesses in the area that thought in a similar way, and whether that cluster had connections to other growth areas in the globe. However, the key factor as to whether you were going to be good at exporting was, I regret to say, size. The larger you are, the more you are able to commit resources and be able to negotiate barriers to moving out into export markets. That is one of the things that, in terms of my work with the Local Enterprise Partnership, made me think about SMEs.
	I am going to commit complete heresy in this forum. In some ways, SMEs have acquired a sainthood in British politics and beyond over the last 15 years. They are an incredibly important part of our economy, but most of them are risk-averse, lifestyle businesses; they deal only with local, not even national markets. I would accuse the so-called entrepreneurs—although we used to call them “capitalist pigs” when we were students in the 1970s—of not actually playing the role which their staff, their colleagues and employees deserve, which is to grow those businesses. There are huge numbers of exceptions in Cornwall, where I come from, and the noble Lord, Lord Cope, mentioned some fantastic examples of successful businesses that export and work worldwide, through the internet or whatever. I would disagree with the noble Lord, Lord Haskel, when he said that we should concern ourselves with
	those businesses that cannot get their heads around IT. If they cannot do that, they should either not be in business or should be written off as potential exporters. Let us concentrate on those entrepreneurs who really want to move forward, take sensible risks and give their employees the opportunity to develop their careers.
	I come to the message that I want to put over this evening. We talk a lot about corporate business, which I was privileged to be a part of in the early part of my career, and SMEs, but we forget the mid-sized businesses and some of the medium-sized businesses at the top end of this category. Companies that have a turnover of £10 million to £100 million and have 50 to 500 staff account for only 1% of UK businesses but they have 20% of business turnover and 16% of employees. This says something about their efficiency and how they work. I congratulate the CBI, for which this is not natural territory in our minds, for bringing out a report called Future Champions around this area. Was this a clever invention? No. If we look to Germany or even to France, we see that this sector of business is the engine of their economies. The Mittelstand—and it sounds as if the committee went and saw some of this—is the engine of the German economy and is excellent at exporting. Those businesses tend to use local supply but export globally; they think globally, but act locally. They tend to have quality products, niche markets and highly skilled employees, which gives them a higher earning capacity. They tend to be more in the manufacturing area, which causes rebalancing. Most importantly, for people like me who come from the regions, they are far more geographically dispersed than large businesses and, perhaps, some small businesses as well. They also tend to allow their staff to have real career progression within the organisation. If things are difficult, they tend to have deeper pockets and financial substance.
	France and Germany have learnt the importance of that sector in driving their economies forward, yet we hear almost nothing about it in the UK. The noble Lord, Lord Haskel, is absolutely right about KfW, the big bank which helps promote these, SMEs and green technology. I welcome the attempts of BIS to start that sort of process here as well. I ask the Government not to forget the middle-sized business community in the UK, which could be an excellent area of growth and export. SMEs are vital. The good news is that the company I went speed-dating with in Bristol will, next week, be recruiting its first person to concentrate on exports. I am pleased to say that she is a Spanish-speaking Brit, and that the company will be looking not just within the European mainland but to South America. Do not forget the middle-sized companies and let us make sure that we help the SMEs which want to move forward and take their staff with them, but let us leave the lifestyle ones to get on with life.

Lord Haskins: My Lords, I, too, congratulate our chairman on his tenacity and exuberance in guiding us through this extremely interesting exercise. I declare an interest as a director of a couple of small companies. I also chair one of the 39 LEPs that the Government have created, in one of the more difficult parts of the country.
	My overall impressions of the experience we have gone through are that there are lots of success stories in the report. Clearly, there is no question about that but, at the same time, underlying it there is relatively poor overall performance by our SMEs, particularly when compared to many other countries. One country that we obviously looked at closely was Germany. In Germany, there is a strong commitment of business organisations towards the well-being of SMEs and a strong community feeling that SMEs matter and help each other. The noble Lord, Lord Heseltine, who I shall speak about later, said that he was in Mumbai recently and ran into no fewer than 150 people representing German commerce there. They were helping SMEs and larger companies to do business there.
	The engagement of regional governments and regional banks has been referred to. It is very powerful, particularly in Bavaria but right across Germany. There is a supply chain made by large companies for small businesses. Seven days a week, a train leaves Munich and heads for Shanghai, over the trans-Siberian railway line. It is full of cars and components made by BMW’s small businesses. The understanding of the supply chain is great in Germany as well. The careful nourishment of SMEs generally came across. While it is certainly bureaucratic, it is effective. The Mittelstand miracle, which the noble Lord, Lord Teverson, has mentioned, was invented by Bismarck 140 years ago and is a huge driving force in the strength of the German economy. There is also a strong emphasis on localism, which I will come back to. I am in cahoots with the noble Lord, Lord Heseltine, on this agenda.
	We can contrast that with Britain, where we have lots and lots of start-ups—that is not bad—but far too many failures at an early stage. That has been endemic for many years in this country because of a lack of training, engagement and understanding about what those businesses are taking upon themselves when they go into it. Sporadic government interventions are constantly changing, not just on this but right across the piece. Successive Governments have turned the course of events, which makes it difficult for businesses to follow them. There was the initiative that the noble Lord, Lord Heseltine, had with Business Links. Some of us had mixed feelings about them, but that idea has gone and something else has come in their place. The other element in our businesses is their inability to grow beyond employing two or three people. In Germany, that element is to be ambitious and grow to employ five, 10 or 20 people. That does not happen here.
	I question the Government’s policy on exports, where there is a strong emphasis on the importance of making the BRICS countries a priority. That is fine for Rolls-Royce and the big companies, but is it realistic for most SMEs? They will have to tackle the tariffs and trade barriers that are there. They will have to tackle the political instability which we are seeing in Brazil, and may see in India and South Africa, and tackle the transactional complexities of dealing with those countries—never mind the corruption and bribery which exists in many of those countries, which people at least have to reckon with in doing business there,
	and never mind the distance or, particularly, the language, which is more acute in those countries than in Europe. There are also, of course, human rights issues.
	We should contrast that with small businesses doing business within the European Union which, even if it is in the doldrums today, still shows that we have an inadequate share of that market. That is so right across the piece but particularly with SMEs. Small businesses do not have tariff problems or trade barriers to deal with there. They have one set of market regulations which, for the most part, work reasonably effectively. The rules within the EU are pretty tough on corruption, so you do not have to worry about that. There is now substantial growth in the eastern countries of the EU and an increasingly accessible infrastructure, where people can move goods around Europe with much greater ease than in the past.
	Should not the EU be the ambitious target for any small business that is starting up? Is the EU yesterday’s news? I spent a day last week in Rotterdam, looking at its port, and I was humbled by the scale of the activity going on there and by the huge potential that still remains. I could take your Lordships to Antwerp, Hamburg or Amsterdam, all of which have thriving trade right on our doorstep. There is widespread dismay and disbelief among many small businesses about talk of full withdrawal from the European Union. A poll last week showed that 70% of small businesses, while they have their reservations, wanted to stay in the Union.
	We found in our discussions of the Government’s support for SMEs that UKTI is well thought of, but not sufficiently widely recognised for what it is making available. Embassies are doing much better than they were—a lot better than 20 years ago. Rather than patronising business, they are beginning to think that businesses have something going for them. I suppose that they may be looking after their own careers by doing that, but it is better. However, too much attention is applied to larger businesses. It is too easy for civil servants and ambassadors to talk to the head noises in Rolls-Royce, which can look after itself. The attention should be directed more towards the smaller businesses. There is a need for more communication with small business. I certainly find this in the LEP, which has a job to improve the communication with small business about what is offered by the Government.
	The noble Baroness, Lady Cohen, mentioned the finance issue. I will not say very much about it, except that it is a confusing picture. Lots of SMEs have told us that they are charged penal interest rates, that the security demanded of them is excessive and that the banks do not seem to want to do business. The banks, on the other hand, say, “Nobody is coming along to borrow money from us”. I think there is a bit of truth on both sides; not as many people want to borrow as we would like.
	I have mentioned devolution. There is no question that the ideas of the noble Lord, Lord Heseltine, are widely supported by business. There is more local support for SMEs through the LEPs than anywhere else, and the LEPs are crucial in getting SMEs off the ground. It is certainly my main priority to have the relationship with the SMEs as the driver for the local
	economy. The banks have also got to learn about devolution. We learnt in our studies that a local bank manager—at any rate, one in my area—is not allowed to authorise more than £50,000 to a small business. It otherwise has to go through the computer to the central system to make that judgment. Banks need to think about restoring the power and authority of local bank managers, to give them the discretion to make business judgments face-to-face with businesses, rather than relying on computers to do the job for them.
	Finally, what can businesses do to help themselves in this? Time and again, we find the situation is that local authorities and businesses are saying, “What are the Government going to do for me?”. That is important, but what can businesses do for themselves? First, big businesses must look more to small businesses for innovation. That is where the innovation has come from in the past. Big business must recognise that and search out those businesses which are innovating and support them. Secondly, small businesses should collaborate much more with each other. We saw some excellent examples of collaboration in Wednesbury, which I should say is also promoted by UKTI, where high-tech small businesses in the aerospace industry that are trying to get into the American market were working together to establish a base in America. That is the only way you can do business in America, and it was working very successfully.
	The small businesses that we saw being really successful had just got on with it. They had nothing to do with government. They did not even know where the Government were but they were getting on with it, mainly because they had a great idea which they believed in. They had the up and go that is so necessary. Nothing can compare with the flair, innovation and leadership in achieving business success, whether the business is big or small. The Government must do all they can to support these policies and make sure that they do not inhibit them.

Lord Empey: My Lords, I thank the noble Lord, Lord Cope of Berkeley, for the courtesy and patience which he exhibited in great measure throughout the Select Committee’s work. It was the first opportunity that I have had to be on a Select Committee in your Lordships’ House and it was a thoroughly enjoyable experience. I thank the noble Lord, Lord Cope, for his consideration. We were also extremely well served by a very active and dedicated staff. As has been pointed out, due to the accidents that we seemed to attract, there was a sense of embattlement as we came towards the preparation of the report. Members of the committee and staff seemed to be dropping like flies. However, they all rallied round—even from hospital beds—to produce the report. That indicates their commitment. I would also point out that, as I am sure all noble Lords will know, nobody puts words into the mouth of the noble Lord, Lord Cope of Berkeley. What he says, he says for himself.
	I should like to touch briefly on the finance from a slightly different point of view. As was said by the noble Lord, Lord Teverson, there are two sides to this story. I was recently invited to chair a meeting of a
	business forum in London. A representative of the Institute of Chartered Accountants in England and Wales was present and we looked at alternative sources of finance. In this country we are heavily dependent on bank finance, which accounts for about two-thirds. However, that is not the case in other countries, such as the United States. We now have things such as Funding Circle and peer-to-peer lending, and new opportunities are out there.
	What struck me most on that occasion was a story relayed by the accountants. They had carried out a survey of SMEs, asking them how much preparation they did before putting a business case to their banker. The average answer was two days. I was shocked by that. The fact is that banks should not agree to all applications from SMEs, and in fact that is part of the reason we got into difficulties ourselves. I remember being in business and paying at one stage an interest rate of 22.5% on business loans. Can one imagine what would happen in this country if interest rates began to rise to any extent? We have been living in a fool’s paradise, believing that you can have money for next to nothing. It is not going to be like that for ever. SMEs must sharpen up their act. No matter who you are, putting a business case together in such a short space of time is totally unrealistic and, in fact, reckless.
	As was mentioned by the noble Lord, Lord Cope, we were shocked by the statistics given to us by UK Export Finance. Of course, most of the work that it was doing when it came to see us in the summer of last year was for Rolls-Royce and BAE, which we fully understand. When we pressed the organisation, we discovered that at the time it was helping 17 SMEs. I know that since then it has appointed regional representatives, and it is widening its scope and trying to make its services more available. However, I would be very interested if the Minister could update us on how that process is going. Are the regional representatives settling down? Are they actually helping to deliver the growth that we all want?
	The other area I want to mention is training. The noble Baroness, Lady Coussins, gave us a very interesting speech on language. The committee heard a lot about that, and I think we have lots of lessons to learn there. However, other qualifications are necessary, over and above language. I declare a non-pecuniary interest as a vice-president of the Institute of Export, a charity which was established in 1935. It is the only professional body in the United Kingdom offering recognised, formal qualifications in international trade. It seems to me that if you are going to drive a car, you get a lesson in how to drive. If you are going to become a mechanic, you learn and you serve and you become a mechanic. If you are going to export, why should it be any different? Why should you not learn the ropes? Why do you not get qualifications in it? Why do you not learn what is involved in international trade? Having that knowledge enables you to avoid many of the pitfalls. These qualifications are recognised by Ofqual, and they are not hugely expensive. There are short courses, and they can be done by distance learning.
	It is essential to have that basic skill as taking on exports can be a very difficult business. People are afraid of not getting paid and they do not know the
	customs in a local area. As the noble Lord, Lord Cope, pointed out in his opening remarks, with the change in the population mix in this country, people came to the committee to offer their services, because they had connections in some of our future key markets. There are people living in this country who are dedicated to doing business and we are not actually using that expertise which is on our own doorstep. We need to ensure that people get these qualifications.
	The whole business ethos and the culture in this country have been anti-business for a number of years. I know the Minister has tried very hard during his term of office to change people’s minds about that. At the end of the day, as was said by the noble Lord, Lord Selsdon, it is true that we have a huge trade deficit, but a country which is economically weak is weak from a defence point of view, is weak from an international point of view and is weak from an influence point of view. We need to get that message to our schools and get mums and dads to say, “Well, there could be career opportunities here”. I think it is a matter of drawing all of those things together.
	I would like the Minister to tell me what progress has been made with UK Export Finance, and what advice he and the Government would give on trying to promote the acquisition of suitable international trade qualifications. This would ensure that when people in SMEs knock on the door they have the expertise and they know what a customer is. That knowledge is somewhat lacking in this country. I have often felt that we have to readjust, because we should be an outward-looking nation. We can survive only if we can trade and move in and out, keeping our inlets and our outlets open. We will succeed only if that is ingrained in people at a much earlier stage throughout the education system.

Baroness Drake: My Lords, I, too, would like to take the opportunity to compliment the noble Lord, Lord Cope, on his admirable chairing of the committee and on the excellent support that we received from the staff.
	Increasing the contribution of SMEs to export-led growth acquires a new imperative when one looks at the structural shift taking place in the UK economy. The 1.3 million increase in the business population, from 3.5 million in 2000 to 4.8 million in 2012, has been mainly driven by SMEs. Over that same period the number of large private sector enterprises decreased by 10.2%, falling from 7,200 to 6,500.
	SMEs are acquiring an increasing importance in the UK economy and delivering the step increase in exports that we so badly need. Finance to exporting SMEs must be assured. It is beyond dispute that bank lending to businesses has fallen, but the causes of this decline are contested. The noble Lord, Lord Heseltine, said that there did not appear to be a definitive answer as to whether the decline is due to a lack of supply from banks or to limited demand from businesses. What the report did identify, as my noble friend Lady Cohen mentioned, was the extent of the complaints by SMEs and executives about the insufficiency of loans
	and other services from the banks on “reasonable terms”. The distinction between the finance available for loans and the terms under which it is available may in part explain why some banks, such as RBS, argue that supply is not the problem, while at the same time exporting SMEs frequently argue that it is insufficient supply on “reasonable terms” which is at fault. Contributing to the problem are bank lending practices such as setting punitive charges and interest rates; onerous guarantees; exclusion of certain overseas markets from loan approvals; and the exclusion of certain activities from loan approvals. The replacement of relationship banking, where loan applications are judged on their merits, with a centralised, formulaic approach to lending decisions, is also part of the problem.
	A pervasive formulaic approach may be a consequence of banks’ need to strengthen their balance sheets, comply with tighter regulations and reduce their risks, but it has to be confronted and addressed if SMEs are to access the finances needed for exporting. A return of local bank managers is unlikely to improve the position unless they are also empowered to have the discretion to decide on loan applications.
	On Funding for Lending, billions may be drawn down by participating banks but insufficient is getting through to SMEs. The report recommended that the Government should study how banks assess the credit risk of SME exporters and different overseas markets in some detail. The Government’s published response was disappointing. While it said that the new business bank is expected to work with relevant bodies to reduce the obstacles to accessing finance on reasonable terms, it went on to say:
	“It is not thought that a further study at this time would be productive”.
	It was pleasing, therefore, to see the recent announcement by the OFT that it is bringing forward its review of banking for SMEs. The proposed scope of the OFT review includes whether SMEs have access to services that meet their needs and represent good value and whether there are types of SME that face particular difficulties and, if so, why. I acknowledge that the industry is working towards a voluntary disclosure regime, but as the Parliamentary Commission on Banking Standards observed, increased disclosure of lending decisions by the banks is crucial to enable policy-makers to identify markets, communities and geographical areas currently not well served by the mainstream banking sector.
	The report also notes the very small number of SMEs helped by UK Export Finance, but recognises that the Government have now started to put more emphasis on it helping SMEs export overseas. However, new products such as the bond support scheme and export working capital scheme, launched to meet the gaps in the support to exporters from private sector providers, are accessed, again, through the banks.
	The Government may have reduced the amount of risk that the banks are required to accept on these new schemes, but if the UKEF is using the high street banks as its route to market, given current bank lending practices these schemes are unlikely to deliver the desired help to SMEs to export. This is a view
	shared by bodies such as Science, Engineering and Manufacturing Technologies Alliance and Trade & Export Finance Limited.
	Similarly, British SMEs cannot apply directly to the European Investment Bank for loans, but must go through one of the participating banks which are required to match European Investment Bank loans from their own funds. Again, there is the potential for bank lending practices to constrain SMEs’ access to finance. The European Investment Bank’s own reports show that British SMEs have borrowed relatively little compared with several major EU economies such as France and Spain.
	It is welcome that in response to the report the Government have committed to providing updates on activity in 2014 and 2015. Will the Government commit to commenting specifically and in some detail on what progress has been made in reducing the obstacles to financing SME exports on reasonable terms and the extent of the increase in the support from UKEF and EIB to SMEs’ export contracts?
	An objective of the new business bank is to support the development of diverse debt and equity finance markets for businesses and increased supply through new finance providers. It is true that private sources of venture capital have fallen in number in recent years, but investment provided by both private equity and venture capital still makes a significant contribution to exporting SMEs. In 2012, 90% of the companies invested in by British Venture Capital Association members were SMEs. It is important that UKTI provides advice to SMEs on all sources of finance.
	As the economy recovers, there must be confidence that the supply of finance will meet future demand and that there will be sufficient provision of long-term capital for SMEs to sell overseas. In his Statement on Building the Business Bank, Vince Cable, Secretary of State for Business, Innovation and Skills observed:
	“Economic analysis suggests that the following types of firms are particularly underserved for finance: SMEs of all sizes who seek finance to expand their business or to develop new products and services; SMEs who lack the collateral to take out a secured loan; SMEs at the smaller end of the SME scale; Young SMEs which have existed for less than five years”.—[Official Report, Commons, 21/3/13; col. 50WS.]
	Those four categories add up to a significant proportion of SMEs which have the potential to export being underserved.

Lord Storey: My Lords, first, I convey the apologies of my colleague, the noble Baroness, Lady Kramer, who served on the committee and was intending to speak this evening, but she has been invited by Barclays Bank, no less, to have dinner with some senior directors. She thought that it would be a good opportunity perhaps to influence or change their views.
	After the Second World War, the then Government urged businesses to either export or die. I suggest that this motto is as important today as it was 60 years ago. Indeed, the accelerating effects of globalisation, combined with increasing competition from the world’s emerging economies, have, if anything, increased this maxim’s resonance.
	Here in the UK, we do not have as large a percentage of businesses exporting as do our neighbouring competitors such as Germany, France or Italy. If we could increase the number of exporting firms to the EU average, we would go a long way to reducing Britain’s trade deficit, a shortfall that we have shouldered almost every year since the end of the Second World War. Why is it that the French, the Italians and the Germans are able to export more than us?
	It is imperative we ensure that we are doing all we can to encourage an export-led recovery. We therefore established this Select Committee on Small and Medium Sized Enterprises to see which steps could be taken. It was my first Select Committee and it was a privilege to sit on it. I pay tribute to the chairmanship of the noble Lord, Lord Cope, and the committee staff’s professionalism. It should also be mentioned that it was the suggestion of the noble Lord, Lord Popat, that this topic be looked at in depth.
	After months of collecting oral and written evidence and visiting exporter “success stories”, our Roads to Success: SME Exports report was published this spring. If its recommendations are taken seriously, and if government agencies take action to ensure that SMEs know where to go for help, I suggest that we will see major improvements.
	The committee rightly concentrated on the wider benefits of increasing SME exports, but of course exports are also invaluable to each individual company. It is crucial we get more firms exporting; it is essential that we encourage those that already do so to look to new and higher-growth markets.
	I was taken with some work carried out by the University of Glasgow which looked at the benefits to their own business of those individual companies that exported. The most striking statistic they found is that businesses setting out on their export journey achieve on average a 34% boost to their company’s productivity; that is, a rise of over a third in their first export year. The university’s research also found that these exporting businesses were 12% more resilient to weather tough economic times and, finally, that such firms are also better at innovation.
	When you export to a range of countries, you need to be aware of the different tastes, needs, fashions, cultures and, indeed, foibles of each market. The lessons learnt are so powerful that almost every firm that begins to export also witnesses an increase in its domestic sales. The result of these learning processes is that firms, having been exposed to the competitive world of international trade, spread best practice here in the UK.
	Countries have four engines of growth: government spending, consumer spending, investment and trade. Government and consumer spending is not likely to rise significantly, so the importance of getting more firms both to export and to invest in their technologies, plants and equipment is the only way in which the UK can pursue the growth we so desperately need.
	The Select Committee found that there is plenty of help out there for firms. UK Trade and Investment, as we have heard, is worthy of considerable note. As we also know, many businesses are members of trade
	associations, chambers of commerce and support organisations such as the Institute of Directors, the Confederation of British Industry and the Federation of Small Businesses, to name a few. All these organisations must pledge—and have pledged, I hope—to increase exporting. I very much hope to see UKTI and UK Export Finance blowing their trumpets even louder to promote the services that they can offer.
	The UK currently exports half its goods and services to the other 26—soon to be 27—European Union states. This is good news, although it is largely to be expected in our quota-tariff and free-trade economic area. However, that 50% goes to a group of nations that together represent only 7% of the world's population and only 18% of the world's GDP. Furthermore, this group of nations is potentially shrinking, not growing. We need to seek out new markets wherever they are. We have to take advantage of wherever growth is emanating from. I was pleased to learn that, for the first time, UK exports to China averaged more than £1 billion a month between February and April. We must remain optimistic about our SME exporters, and those who can must help SMEs on their journey to further growth. The Roads to Success report will undoubtedly assist us in this important enterprise.

Lord Taylor of Warwick: My Lords, I thank the Select Committee and, of course, its advisers for this excellent report. I wish to focus mainly on paragraph 6, which concerns language and diversity. There is no doubt that exporting is vital to economic growth. A number of young people were sitting in the Gallery watching this debate. That reminded me of the tragedy of more than 1 million young people unemployed. For their sake alone, we need to increase growth, and that must come from increasing exports.
	My noble friends Lord Cope and Lord Teverson and the noble Baroness, Lady Coussins, all mentioned the language problem, which we can no longer ignore. The National Centre for Languages has produced a report called Talking World Class. It asserts that language gap leads to a trade gap. It criticises the lack of language skills that we have in this country. It was quite shocking to see the research produced by the European Commission that the UK has the lowest number of people able to speak other languages in a league table of 28 European countries. According to the report, 80% of export managers in the UK cannot communicate competently in another language.
	In the year to March 2013, the annual export value from all regions in the UK fell, except in two regions: East Midlands and West Midlands. It cannot be a coincidence that, for example, UKTI East Midlands has been proactive in taking advantage of the diversity of its workforce. Its initiatives include developing the understanding of the business culture of the country which it visits on trade missions. It organises day-long language and culture sessions for people travelling overseas. It liaises with translators, interpreters and training providers. It identifies opportunities to use overseas students. There is an annual international communication masterclass, which is a day-long seminar, attracting about 100 delegates.
	Understanding cultural and linguistic diversity, both domestically and overseas, is key if we are to increase trade and exports. There have been several reports in recent years demonstrating beyond doubt that diversity is good for business. It is not just about equal opportunities. Diversity produces new ideas, new markets and new customers. The Federation of Small Businesses, the Confederation of British Industry and the Institute for Small Business Association have produced ample evidence for this. As for immigration, immigrants are on average younger, more highly skilled and more likely to be of working age than their host counterparts. Black and ethnic minorities in Britain are now having a real impact on small and medium-size businesses. I give as an example my home city of Birmingham. Only last summer, Prince Charles presented a Jamaican bakery company, based in Birmingham, with the prestigious UK Small Business of the Year award. Indeed, Prince Charles was so keen to test the evidence that the company sent a few of its delicious pasties to Clarence House for, shall we say, closer scrutiny. The owner of that company had left Jamaica with his family in the 1960s and started a very small bakery in 1988. Now it has a factory employing 50 staff and supplying the five major supermarkets. We need to utilise the skills of men such as that. About 12 miles from Birmingham is Wolverhampton. There, another Jamaican started a medical technology company in 2004. Now it has 200 employees and has produced award-winning equipment such as a device to reduce the risk of deep vein thrombosis.
	I should point out that I have no connection with either of the two companies but each is another success story. They were immigrants who came to Britain with nothing. Immigrants are coming from more countries than in the past, including Poland, China and India. In our business community there is potentially more access to different language skills and knowledge of different cultures when it comes to trade delegations representing Britain abroad. Through our universities, we have access to overseas students who can help us bridge the language gap that the noble Baroness, Lady Coussins, spoke about. We know that Mandarin is now very much the language of business and we have Mandarin speakers in our localities. We need to capitalise on their skills and experience.
	Many in the small business community have the energy and ambition—the get up and go as the noble Lord, Lord Haskel, described it—but lack awareness of the help available to them. While I am pleased that the Department for Business and BBA have a national mentoring portal, Mentorsme.co.uk, there is evidence that the small business community is unaware of these kinds of facilities. I am very impressed by the Get Mentoring project where small business owners can get free access to experienced business people for advice. But the small business community is not aware of that and more needs to be done to publicise these excellent initiatives.
	My next point may surprise noble Lords but, in my submission, faith groups can play an effective role in promoting small business both here and trading abroad. A new report, Faith in the Community, provided fresh insight into the role of churches and other faith groups, and the ways they can liaise with business. The report
	contains information from 150 local authorities which shared how church and other faith groups help them carry out many of their tasks, especially in liaising with local business. Many black and ethnic minority businessmen have their roots in the churches, and indeed in mosques and temples. Again, I urge the Minister to look at the faith groups and churches, because therein lies a tremendous reservoir of talent that it seems is being ignored.
	There is one Government policy of great concern to the Caribbean business community: the air passenger duty. This tax is charged on every airline ticket from the United Kingdom. The problem is that it is based on a price-banding system related to the distance to a country’s capital city. That means it can be cheaper to fly to more distant locations in the United States than to destinations such as Jamaica or Barbados. The levy is set to rise each year by the rate of inflation, pricing many in the UK Caribbean community out of being able to travel to the region on business.
	The Select Committee did not have a lot to say about diversity but the issue is crucial to Britain’s future economic growth. The Prime Minister set a target of doubling UK exports by 2020. Does the Minister feel we can attain that target? This is an excellent report but it has to be acted upon if the target is to be achieved.

Lord Mitchell: My Lords, I was a member of this Select Committee when it began its hearings. I was getting myself all fired up to contribute to a subject that means a great deal to me when the rug was pulled from under my feet. On my giddy elevation to the Front Bench, I was ordered to stand down from the committee. Of course, I had no option—the rules are the rules—but I was sad to leave.
	That said, it is with great pleasure that I welcome the opportunity today to debate Roads to Success. What a tour de force it is: forensic, totally focused and clearly written. Throughout its pages the very clear fingerprints of its chair, the noble Lord, Lord Cope, are distinctly visible. From these Benches, I congratulate him and his colleagues on producing it. I have two reservations, which I would have pushed had I been on the committee. First, the digital revolution is barely addressed. Secondly, I am not convinced that it reaches out to the new, young entrepreneurs—those who dress in T-shirts and jeans, and are for ever plugged in to their music. That apart, I am much heartened by its contents.
	I very much hope that the report will attract the attention it deserves within government but somehow I doubt it. The truth is that Select Committee reports produced by your Lordships’ House get scant attention in the corridors of Whitehall. I have had the honour to sit on several Select Committees. On each occasion, noble Lords are chosen to serve and have impeccable backgrounds, the witnesses are grilled and the clerks and advisers are of the highest calibre. The reports produced, just like this one, are outstanding—but what happens? They disappear into the bowels of the relevant department and eventually the Government produce their answer, just as they did for this report. It is always the same. It is obfuscatory, avoids the
	recommendations and sends the report back to Parliament with the clear intention of kicking it into the long grass. This is not an attack on the parties opposite. It also happened when we were in government. So often Ministers and their civil servants regard our Select Committee reports as a pain to be endured and they treat us accordingly. This is my second rant in your Lordships’ House today. Enough is enough—it is time to stop. This high horse will be ridden no more.
	When I was in my 20s—light years ago—I remember an advertisement in Piccadilly Circus. The noble Lord referred to, “Export or die”. I remember, “Either exports go up or Britain goes down”. As I remember it, there was a little flashing Union Jack underneath it—nothing new there. Low exports and low productivity have been the bugbears of our post-war economic performance. Small businesses are critical to our economy; everybody is agreed on that. They employ 60% of our workforce and—a hugely important point—they are the route back into employment for many of our long-term unemployed.
	Much of our time is spent looking for ways to support the UK’s small businesses; encouraging them to export is a good way of doing this. New research from the Enterprise Research Centre shows a clear correlation between exporting and growth in businesses of all sizes, and we have touched on that this evening. EU companies that export grow twice as fast as companies that do not, and internationally focused SMEs are three times more likely to introduce an innovative product. My view is that it is in the mindset of a management that is interested in new projects and developing in all areas, not just exporting.
	Today, we rightly focus closely on the many important recommendations made in the report. However, we should also look at ways to encourage innovation in British companies, given this strong link between companies that innovate and those that export. The latest EU figures suggest that the UK is currently 32nd out 35 countries when it comes to innovative products and processes, and 25% of UK SMEs are innovative, compared with the EU average of 34%. Recent figures from the Big Innovation Centre, which works with government, higher education and industry, illustrates how the difficulties of getting finance stifle innovation.
	More than one in three innovative firms looking for finance in the period 2010-12 received none of the credit that they wanted. There is no shortage of statistics to support the diagnosis that the lack of support from our financial institutions harms businesses in the UK. We know about this, it is discussed almost every day in your Lordships’ House and it is a big problem that we have in this country. The report shows that the three-month average rates of lending to small businesses have been negative since August 2011. Looking at the Bank of England figures, I also count only three individual months over that period when net lending to small businesses has been positive.
	The lack of small business lending harms innovation and exports. We need a laser-like focus on improving access to credit for these companies. The Government’s expansion of Funding for Lending this April was a positive step, but it is clear that to resolve the market failure at the core of this issue, we need to be more
	radical and look at structural change. Many noble Lords will no doubt have shared my surprise on reading that between March 2011 and August 2012, UK enterprise finance helped 31 companies, of which 21 were SMEs. Noble Lords could be forgiven for thinking that a couple of zeroes had fallen off these numbers.
	This cannot be enough. Will the Minister please tell us whether there are any plans to co-ordinate the activities of UK enterprise finance and the Business Bank? The case study within the report of Alderley plc, the engineering business that felt that it was being harmed by credit decisions being made in London rather than regionally, is compelling. It is a scenario that we often hear about and was mentioned by the noble Lord, Lord Young of Graffham, in your Lordships’ House yesterday. The end of relationship banking has harmed small businesses, which find that instead of local bank managers who understand them and can use judgment about whether they should have credit, decisions are now made on a centralised basis, which is often also computerised. Ticking the boxes is not the way to proceed.
	I also agree with the committee’s recommendation that more attention should be paid to SMEs when the Government draw up trade agreements. The EU-US trade negotiations are critical and I would like the Minister to update the House on how these talks are proceeding. I am by any assessment a serial entrepreneur; my businesses were in IT services. To me, overseas activities were always crucial. Our customers were international, how could we provide a service if we were not international too?
	Of course, you actually have to like abroad. You need a feeling for other people’s culture. My language skills are halting, but I forced myself to learn enough German to be able to stand up and make presentations in Frankfurt. Whether they understood me is another question, but they were too polite to say. Today, new technologies such as Google Translate are coming to the rescue, but nothing—nothing—replaces being with your customer and being able to talk to them.
	I have to say that doing business in other countries is really good fun. It is testing, of course, but if you roll up your sleeves and are prepared to catch early planes and attempt to speak your customers’ languages, it really pays off. I have also found that taking just a little time to brush up on another country’s politics—what is the story of the day—and even talking about football works a treat.
	I really enjoyed the speech of the noble Lord, Lord Teverson. I feel that I have a soulmate in him, although I have to say that when he started on the subject of speed dating, I began to keep my distance. I agree. There are many lifestyle companies out there, many of them are static and we must not confuse them with the small and medium-sized companies that are dedicated to growth.
	I was disappointed that the report barely touched on the digital revolution. When I give speeches, I highlight how the world is changing and the speed of that change. If businessmen are not having sleepless nights about digital changes—if they believe that the digital revolution does not concern them and that it is
	just a passing phase—they are in for the chop. Ask Jessops, HMV or Blockbuster video—many more will follow them. Competitors in every country are obsessed by changes in the digital revolution, and we should be too.
	My final point is about young entrepreneurs. If I were a young tech city entrepreneur, I doubt that UKTI would have much appeal to me. It is too uncool by half. Does UKTI have a branch in Shoreditch or on the Cambridge Science Park? That is where the action is. Its people need to take off their ties, get themselves personal iPads and drink skinny lattes, just like everyone else there. They need advisers in their 20s, not in their 50s.
	In summary, this is an outstanding report. Despite my pessimism, I hope that the Government take serious note of its contents. One day soon, I hope that the lights in Piccadilly will read, “British exports up yet again”.

Lord Green of Hurstpierpoint: My Lords, I begin where everyone else has by congratulating my noble friend Lord Cope on securing what I believe passionately to be an important debate on trade and investment relating to small and medium-sized businesses. My noble friend has long supported British business and British exports, as, of course, have all the committee members. He and his committee undertook the inquiry thoroughly and asked searching questions not only of my officials and of businesses and business support bodies but of me and my colleague and friend the Business and Enterprise Minister.
	Of the 23 recommendations in the report, I think that I can say truthfully that we agree. We have essentially fully accepted all of them, with one or two exceptions where we may not agree with the specific recommendation but absolutely share the intent behind what is proposed. Above all, on recommendation 1, which concerns a report back next year and the year after, I am happy on behalf of the Government to endorse and accept that.
	This is an important topic for us all. More than one noble Lord has called attention to past advertisements saying “We export or we die” or, “Exports go up or Britain sinks”. Briefly, I go back even further than that, prompted by the recent Diamond Jubilee of the Queen’s coronation, to remember that in 1953, the UK’s total exports were just £3.6 billion. Last year, they were £488 billion. More importantly than the nominal figures is that in 1953, the value of exports to UK GDP was about 10%; it has now risen to 30%, which reflects how Britain is participating more in an increasingly international economy. The bad news is that Germany’s percentage is more than 40%, so we may have come some way since the 1950s, but we still have some way to go.
	A number of noble Lords have referred to the various targets and challenges that we have set ourselves: those of doubling trade exports by 2020, getting 100,000 new SMEs into international markets, again by 2020, and doubling the client base of UK trade in investment from 25,000 to 50,000 by 2015. We are well on track
	with the last of those. The client base of UKTI is growing rapidly. The target of doubling exports by 2020 is a challenge. Frankly, if we got somewhere near it we should feel extremely pleased. It would involve increasing exports as a share of GDP to over 40%, which is where, as I have just mentioned, the Germany economy now is. This is not a completely unfeasible challenge, but it is certainly a demanding one.
	I assure the noble Lord, Lord Mitchell, that we shall take this report very seriously. I am not going to allow it to gather dust. There are a number of important suggestions in it. There is repeated reference in it, and in comments by noble Lords, to the awareness issue. UKTI gets good satisfaction ratings. They are not as good as they could be and could be better, but they are in the mid to high 70s. I would like to see them at around 90%. Dissatisfaction levels are low, at around 6% or 7%. This is clearly a case of “good but could get better”.
	The level of awareness is not satisfactory. For UKTI this is in the mid 50s. For UKEF it is in the 20s. This is not good enough. It is a priority for me and the Government to ensure that we raise awareness of these important services that are available. In particular, as we speak we are running a pilot marketing programme in the north of England to raise awareness of UKTI and UKEF. I will be analysing carefully the results of that pilot when they are complete in the next few weeks. If we get encouraging figures, we will consider extending that advertising campaign to the rest of the country.
	In the short amount of time available to me, I will try to cover a number of issues that have come up in your Lordships’ comments, especially language, intellectual property and the reference that my noble friend Lord Cope made to the Bribery Act at the start. I say to the noble Baroness, Lady Coussins, that I share her passion for languages. I am a linguist by origin. This was admittedly a long time ago, but I strongly believe that not only do we need to invest more in languages, but that investing in languages improves your English. To paraphrase Rudyard Kipling, what does he know of England who only England knows, or what does he know of English who only English knows?
	This important area is quite complex. It is unrealistic to expect an SME, unless it has a Chinese speaker, to be able to gear itself up in Mandarin to the point where it can speak business Mandarin in pursuit of business opportunities in China. We must be realistic about what is achievable. We have recently updated a brochure on language management strategy. We will continue to work on it. I would like to write to the noble Baroness on some of the complexities of the language issue. There are some long-term issues about the teaching of language in schools, and noble Lords are aware that the Government have recently focused much more attention on this. That will take quite a long time to pay dividends. In the mean time—and I do not just mean in the mean time—we need to celebrate the fact that, because of the diversity in this country, we have a terrific language base on which to draw, in terms of skills that can be brought in for marketing, for example, with an appropriate language attached to it. I assure the House that we take the issue of languages seriously.
	Finance is quite properly of concern to a number of noble Lords. The noble Baronesses, Lady Coussins and Lady Drake, made a detailed analysis of some of the issues that we face. Given my former career, I am perhaps better placed than many to reflect on the weaknesses of commercial and business banking in this country. From that experience and from my experience going round this country in the past two and a half years and meeting businesses of all shapes and sizes, there is indeed an issue. It is quite plain that there are circumstances where companies with legitimate financing requirements cannot get financing because the normal templates are being required and inadequate imagination is being applied to the topic.
	What I think has happened over not just the past three or four years of the financial and economic crisis but over the past 20 years is that the skill base of business banking in high street banks has been deteriorating. This has happened partly because average career bankers with a reasonable dose of ambition have wanted to head either for the excitements of corporate and investment banking or for the sexy end of the retail banking market and did not see themselves as spending the rest of their career in a relationship management role in, let us say, Rotherham. The central functions have responded by disempowering those relationship managers, so we have the result that the noble Baroness, Lady Coussins, commented on. If I have some good news, it is that all the CEOs with whom I have regular dialogue and the heads of commercial banking are focused on this and are determined to address the problem. I hold regular round tables with the banks under the auspices of the British Bankers’ Association. The general problem, I have described. In international trade, in particular, there is even more of a problem with the skill base. They are focused on that. The challenge is that it will simply take time to turn the supertankers.
	In the mean time, we need to be doing two things—first, to ensure that as it gets going the business bank is able to challenge them on the way in which business lending is provided and, secondly, to encourage new challengers. There are some new challengers. There are a number of new challenger banks, and a number of noble Lords referred to the various other techniques for financing that are gaining some traction, although I do not believe that those other financing sources can ever be an adequate alternative to, or substitute for, a properly run business banking presence on our high streets. This is an important issue, and we will continue working at it.
	Specifically with regard to UK export finance, I can report, first, that there is an awareness issue, to which I have already referred, and secondly, that new products are beginning to get more traction. Like noble Lords, I have been extremely disappointed by the take-up. I put it down to a considerable extent to lack of awareness. We have therefore put export finance advisers in every English region and in Scotland, Wales and Northern Ireland. We had one in place in each of those areas by the end of last year, and I have just authorised a doubling so that it will go from one to two in each of the regions, plus in each of the devolved Administrations. I have also started putting export finance advisers in key locations overseas. We have one in Singapore,
	we are going to have one in Dubai, and I have authorised the recruitment of further EFAs in other markets of importance to us around the world, in Brazil and in Africa, where I think we need one in the Francophone part and one in the Anglophone part, on the ground at that end, whose job is, first, to help incoming British companies, and secondly, and very importantly, to negotiate sponsor credit lines with the sponsors of big infrastructure projects around the world so that British companies can get access to finance as they seek to win business as part of those infrastructure projects. So we are on that case.
	It is early days to tell what quantitative results this is going to have, but there is anecdotal evidence. The most recent was at lunchtime today when I was with the Suffolk Chamber of Commerce, which reported that the presence of the UKEF financial adviser is making quite a lot of difference to a number of its members. I hope that we will have more specific hard evidence when we report next year.
	My noble friend Lord Cope raised the important issue of intellectual property. The British Government will continue to work hard at lobbying in international fora for better protection and recognition of intellectual property. As I think the House is aware, we have started putting intellectual property attachés in some of the key markets—China and Brazil—and will look at how that is working in the course of this year. We will consider expanding this coverage at the end of this year if it looks as though it is delivering value to British companies that are worried about theft of intellectual property as they go into those markets.
	Finally, I assure the House that I take this report very seriously, as do the Government, and that this is a long-term commitment. If there is anything in public policy which needs to be treated with a sort of apolitical consistency over the years, this is it. As a number of noble Lords have mentioned, we have lived with a constant weak trade position in all of our working careers—I can safely say that. It has not got any better of late; again, one or two comments have been made about the first quarter, which was not good. We suffer from the headwinds from the eurozone. Roughly speaking, our exports are still growing quite nicely to the emerging markets, but they were down in the eurozone. We have a long way to go.
	I find myself saying regularly to my ministerial colleagues, to my official colleagues, to the media and to anyone who will listen, that this is a marathon, not a sprint, and we have to stick at this as a national collective effort over at least the next 20 years. The good news is that we can do it. I mentioned that I travel round this country a great deal—I visit each English region and the three devolved Administrations at least twice a year. I have seen businesses from every sector, of every shape and size—some of them the mid-cap companies—and I see companies that are taking on the world. As the noble Lord, Lord Mitchell, said, it is fun to do that. If you are not the kind of person who finds other countries and cultures fun and interesting, you will never be a successful exporter. You find these people across the range of the sectors of our economy. This is not just about high-tech or manufacturing but about all sectors.
	Finally—another finally—I say to the noble Lords, Lord Haskel and Lord Mitchell, that clearly the digital economy is becoming more important. We are obsessed with making sure that the support that we provide to small businesses takes into account the increasing importance of digital trading. That is partly about ensuring that they know how to use online trading and that they think about language in the design of their websites—all those kinds of things. It also involves participating in the negotiations within the European Union about the implementation of a digital single market. There are still too many barriers to cross-border digital commerce in the single market and we need to work hard at that.
	On international trade negotiations, the noble Lord, Lord Mitchell, asked about the state of play on the US-EU negotiations. The truth is that we have only just started. Clearly, it is as important to SMEs as it is to the rest of the economy that we do our best to complete a successful free trade agreement with the US, as well as with Japan—another major country with which negotiations are under way. This will be a difficult and, I suspect, quite a long haul, even though we are publicly committed to achieving heads of agreement by the end of next year if we possibly can. We all know that the prize is huge, and the prize for SMEs is very significant. We should never forget the linkage between that and the importance of realising a full single market within the European Union. If we are to complete a deal with the Americans, they will demand a deal that covers the full single market, so we have a job of work to do, not only to negotiate with the US but to see through the full implementation of the single market.
	I close where I started, by thanking my noble friend Lord Cope and his committee for a report that will not gather dust. I am happy to commit the Government to giving a report on what we have done and on further progress in the course of next year.

Lord Cope of Berkeley: My Lords, it has been an interesting debate and I am grateful to all those who have taken part, both members of the committee and the others who have come and joined in and for the kind remarks about myself. I would also like to congratulate those who took part in the debate for very nearly sticking to the advisory time limits, which is more than you can say for the previous debate.
	The noble Lord, Lord Mitchell, was concerned that the report might sink below the parapet. I know exactly what he means, but as the Minister has just been emphasising, this is an ad hoc committee which has, if I can put it this way, life after death. That is to say, we are promised a further update on these long-term matters. These are not matters which will be solved quickly. We are promised an update and we are promised further debates, next year and the year after. I am very grateful to the Minister for his positive approach to all our recommendations and, indeed, to his duties as a whole, and the way in which he is carrying them out. I do not want to go back over the ground we have been discussing today, but I thank everybody who took part in the committee and in this debate.
	Motion agreed.

The Future of EU Enlargement

The future of EU enlargement

Motion to Take Note

Moved by Lord Boswell of Aynho
	To move that this House takes note of the Report of the European Union Committee on The Future of EU Enlargement (10th Report, Session 2012-13, HL Paper 129).

Lord Boswell of Aynho: This Motion invites the House to take note of the report of your Lordships’ European Union Committee, which I have the privilege of chairing, on the subject of the future of European Union enlargement. I am conscious that the comparatively late start to these proceedings may have led to some attenuation of the speakers list and, possibly, compression of the debate. Nevertheless, I am pleased that this debate is so timely, given the immediate accession of Croatia as the 28th member of the European Union; the first accession to the rotating presidency by Lithuania since its accession in 2004; and the imminence of the possibility of discussion about future accession and enlargement at the upcoming European Council later this week. This is a very timely occasion.
	The European Union has a long history of enlargement. Our country was part of the first and what is still the largest wave of enlargement when we joined what was then known as the European Community at the same time as the Irish Republic and Denmark in 1973. Since then, there has been a steady stream of countries seeking to join the European Union. We are now about to embark on our seventh enlargement with Croatia. There are currently five candidate countries and three potential candidate countries, so the enlargement agenda shows no sign of halting.
	Our report considered the process by which aspirant countries moved towards readiness for membership. In doing so, we revisited many of the questions asked in our previous 2006 report, The Further Enlargement of the EU: Threat or Opportunity?. With the benefit of the passage of time and the benefit of hindsight, we reflected on lessons learnt from the 2004 and 2007 enlargements.
	I also express my gratitude to all the witnesses who gave evidence to the inquiry, particularly those from countries which have recently joined and those which are on track to join the Union now. It almost goes without saying that we drew immensely on the expertise of our staff in drawing up this report.
	Enlargement is formally a reactive process. It is for individual countries to apply to become member states. However, the Union has always had an enlargement agenda, because enlargement is an integral lever for development and has been accepted as such both in the founding and successive treaties. The current agenda has two main drivers: the first, safeguarding stability and security within wider Europe; and the second, achieving economic prosperity and growth. I believe those two objectives to be intimately connected. Historically, enlargement has had a transformative power. I would evidence that by the political changes seen in recent years in what are now comparatively
	older member states such as Spain, Portugal and Greece. Furthermore, we should remember that the single market is of enormous benefit to all members—new ones and existing ones, too.
	The euro area crisis and questions about the role and governance of the Union have led to enlargement slipping down the political agenda. It has been suggested that some countries, such as Germany and France, may have lost sight of its importance. The United Kingdom Government are to be commended for their commitment to enlargement, and we share the view of many of our witnesses that the momentum in this vital work must not be lost.
	The Copenhagen criteria of the EU set out three key standards that a candidate country must meet to be eligible for membership: political, economic and the ability to take on the obligations of membership. Although these were devised in anticipation of central and eastern European enlargement, we were persuaded that they still represent the right starting points for any future enlargements. In acknowledging this, we were critical of the Union’s failure to apply the criteria rigorously in the cases of Romania and Bulgaria, which meant that on joining they were not at a point where they could meet the full obligations of membership. This, in turn, led to the creation of somewhat unsatisfactory post-accession instruments. The Copenhagen criteria are helpful and should not be weakened.
	The road to accession for candidate countries is, rightly, not just the warm political one; it also involves significant legal, technical and administrative work. The first step of the official enlargement process is an application for membership. After granting official candidate status, the European Council must take a unanimous decision to open formal membership negotiations. A candidate country then conducts negotiations with Ministers and ambassadors of the Union Governments regarding the European Union’s body of secondary legislation—the so-called acquis communautaire. There are 35 chapters of the acquis, such as justice, freedom and security, judiciary and fundamental rights, and freedom of movement for workers. Necessary reforms must be implemented and demonstrated, and we support the rigorous approach to this that has recently been shown. The requirements made of countries have continued to grow and, while this is justified, the Union must take care to ensure that the burden of work it places on candidate countries is not insurmountable—criteria should be strictly necessary, taken in good faith, and should be consistently applied across the board.
	I do not wish to dwell on events in any particular country, but I would say that experience shows that we have far greater influence over our near neighbours and candidate countries when it is clear that together, as a Union, we are serious about enlargement and serious about conditionality—that is, that real reforms are followed by concrete progress in the accession process and that there are also consequences when there is any regression. Yesterday, at a European conference in Dublin, we heard from Valentin Inzko, the high representative for Bosnia-Herzegovina, about the importance of developing in that country a political
	culture of tolerance and compromise. With his great experience, the high representative was very clear about the importance of that conditionality.
	The Instrument for Pre-Accession Assistance seeks to provide financial support for aspirant countries’ reforms. We were disappointed to note the many instances of failure to convert funds from commitments to actual spending, and so we recommended that the next IPA should focus more on the strategic aims of the enlargement policy and the needs of candidate countries. Furthermore, a more rigorous approach must be taken to any backsliding over reform, with the Union being willing to slow or halt the enlargement process and turn off the funding tap. If I may express a personal view slightly beyond the remit of our report, I am increasingly attracted to the option of offering western Balkan countries in particular an opportunity to work together on what might be termed self-help projects to which an appropriate degree of challenge money could be made available by the Commission, with the countries themselves being the generators for this process.
	The Union must learn some tough lessons regarding the resolution of issues between countries. The entry of Cyprus in 2004 without reconciliation or conclusion between its Greek and Turkish populations has led to a continuing entrenched dispute. That has diminished the Union’s leverage in encouraging both sides to reach a settlement. It is distressing and it is difficult to see the best way to handle disputes such as this. On the one hand, using Cyprus as an example again, resolving the dispute was rightly not a condition of joining the Union, otherwise Turkey would simply have gained a veto over its membership. On the other hand, without a resolution having been found, Turkey’s accession process has itself become more challenging. The Union must strive to find a way to keep disputes between countries from slowing down or halting the enlargement process altogether, while also encouraging practical solutions. There are a number of very substantial disputes that must be resolved before the accession of the current aspirant countries. I welcome the plan for normalisation of relations between Serbia and Kosovo, which has been agreed under the auspices of the High Representative and Member of this House, the noble Baroness, Lady Ashton of Upholland. This has opened the way for both Serbia and Kosovo to move forward along the road to eventual membership.
	I have already touched on the political and economic advantages of enlargement. In spite of the economic crisis, the new member states from 2004 and 2007 have seen rapid economic growth after joining. Similarly, compliance with the requirements of accession means that political and, indeed, business landscapes are often changed for the better, with a healthier balance of power between domestic parties and an increased role for opposition parties being fairly common features in new member states.
	The benefits of enlargement are also two-way between old and new member states: the Union is better equipped to deal with its neighbours, and existing member states see economic benefits from the expansion of the number of consumers in the single market. United Kingdom exports to central and eastern European
	countries almost trebled between 2001 and 2011, reaching close to £14 billion in 2011. I am sure other Members will want to speak in greater detail about the risks to certain policy areas represented by enlargement but I shall, for now, limit myself to suggesting that it should be possible to overcome such issues and they should not be seen to deter, let alone to act as a bar, to any future enlargement.
	Debates about enlargement and the future of the Union more generally, often tend to focus on a perception that free movement of labour might prove a risk to domestic labour markets. We heard compelling evidence that this was not the case and that migrant workers had often filled gaps in the labour markets of older member states that were otherwise unfilled by nationals. However, it would be remiss not to acknowledge that there have been some negative impacts from the free movement of persons. For example, the relocation of businesses to exploit cheaper labour costs may have impacted on member states economically, and there is undoubtedly a risk of non-workers travelling to receive social security benefits. However, the free movement of workers is a treaty right and an important element of the European Union’s internal market. Member states need to communicate generally the many advantages to their populations and to work collectively to address any genuine concerns that remain within the existing policy frameworks and within those broad objectives.
	Turning to the future of the enlargement process, it is right that the Union should have a rigorous process for the admission of candidate countries, not least to ensure that necessary reforms are introduced and entrenched. The eastern partnership countries must undertake significant reforms before they can be considered for candidacy, but equally their desire to be considered should not be forgotten in discussions about future enlargement. I hope that the eastern partnership summit to be held in Lithuania in November is helpful in this respect. We recognise that there is some reticence regarding future enlargement, and we recommend, frankly, that the Commission and national Governments together do a better job of explaining its benefits and warning of the costs of non-enlargement. It is not a cost-free exercise to remain with the status quo.
	In conclusion, the Union has a long history of supporting enlargement. One could almost argue that it is within the DNA of the Union to promote enlargement. That is the process that we in the UK have long been associated with and from which we have benefited. Lessons must be learnt from recent experiences, but the current economic crisis and debates about the future role of the EU should not distract us from this important enlargement agenda. The future economic and political stability of Europe in many ways depends on it and it is an intimate part of that process. I beg to move.

Lord Wallace of Saltaire: I simply remind noble Lords that the advisory speaking time for this debate is eight minutes.

Lord Foulkes of Cumnock: My Lords, I am most grateful to the noble Lord, Lord Wallace of Saltaire, as always. I say to him and to others that as the
	minutes ticked by earlier this afternoon and this evening, I realised what a dedicated lot members of the European Union Select Committee are. I particularly congratulate the noble Lord, Lord Boswell. Before the noble Lord, Lord Roper, disappears, I would like to say how wonderfully the noble Lord, Lord Boswell, has taken over from the excellent work that the noble Lord, Lord Roper, did previously.
	Earlier today, in the debate on Scottish separation, one of my colleagues said to me, “You are one of the usual suspects on Scottish separation. Why are you not taking part in this debate?”. Well, obviously, it was because I wanted even more to participate in this debate this evening. There is a connection. If the people of Scotland were unwise enough to vote for separation in September next year, Scotland would have to join the queue for accession as a new member. We deal with this in our report. We point out that it can take a very long time for everything to be agreed, even for a state which had been part of a member state previously.
	I welcome the report’s support for enlargement. As the noble Lord, Lord Boswell, said, there are benefits to Britain in terms of our exports to central and eastern Europe which trebled in the decade between 2001 and 2011 and also in terms of the political benefits—the greater stability that we have in Europe as a result of the strengthening of the European Union. Conditionality has been so successful in putting leverage on the applicant countries to democratise, to ensure the rule of law in their countries and other improvements. That power of conditionality has been much more effective than any urging or other kind of pressure might have been.
	However, the report expresses some concerns about the loss of momentum on enlargement. I share those concerns. After Croatia, no new countries are expected for a decade. That means a real halt in the process of enlargement that has been going on for some time and it will be disheartening for the applicants. I take in particular the case of Turkey. My own view is that recent events in Turkey have increased rather than decreased the need for Turkey to move towards EU membership. Whether it is any likelier or not is a different matter, but I certainly think that it would help. The Government promised to “re-energise” the accession process for Turkey. Can the Minister clarify what progress has been made in re-energising this process, particularly in making sure that the objections from Cyprus and France are dealt with in the discussions?
	I have two caveats in relation to enlargement. The first, as we say in the report, is that there should not be a rush to agree to countries being allowed in as members without sorting out difficulties first. The noble Lord, Lord Boswell, mentioned Cyprus. That teaches us that border disputes must be resolved first. This is a message to Serbia in particular which I hope goes out loud and clear. It is a precondition of Serbia’s ultimate membership that the dispute over its claim to Kosovo is resolved. Bulgaria and Romania remind us that we should not rush to agree membership until all the acquis have been complied with. We should not expect that they can be sorted out afterwards.
	My second caveat in relation to enlargement is a personal one, probably not shared by all—or any—of the other members of the Select Committee. Europe is not infinitely elastic on the eastern side. The northern and western boundaries are clearly defined by the oceans, the southern boundary is defined by the Mediterranean Sea, but the eastern boundary is not clear. I have personal reservations about countries self-defining themselves as European and then being accepted as long as they satisfy the acquis. We should not be straying into taking over—annexing, in effect—what are essentially Asian countries just because they want to classify themselves as European and be members of the European Union.
	We then come to the question of differential membership: flexible geometry, two-tier, associate membership or however you would like to describe it. Our Prime Minister sometimes seems to hanker after some kind of associate membership for the United Kingdom but the Government’s response to our report, thankfully, rejects a permanent alternative to full membership. Perhaps, if I am not asking too much of her, the Minister could explain this apparent schizophrenia coming from the Government. Perhaps it is because she is in one party and the noble Lord, Lord Wallace, is in another or some such underlying effect. The noble Lord, Lord Wallace, tells me they are joined at the hip: I do not believe that.
	Finally, because I want to keep well within my time, all of this assumes that we stay in the European Union. My clear, strong, unequivocal view is that we benefit greatly from European Union membership and that, as an important corollary, other countries benefit from the United Kingdom being a member of the European Union, which is not an unimportant matter. The isolationist, Little Englander argument of UKIP is exactly the same as the one used by the SNP trying to break up Britain. Exactly the same arguments are being used and they are equally wrong.
	Of course the European Union needs reform, but we should not arrogantly believe that we are the only ones who see the faults in the European Union—in the Commission, in the structures, and other aspects of it. Other countries do as well. We should, however, seek reform from within, building alliances with those who share our views on the necessary reform. There will be different alliances with different countries on different issues. It takes work and time but it can, and should, be done. We should not be idly threatening to leave the Union if it does not do what we think is right.
	This report, like the others from the European Union Select Committee, represents a very constructive part of the process of necessary reform within the European Union and I strongly endorse it.

Lord Teverson: My Lords, I start with the Arab spring, which I was discussing with some friends and colleagues here on the Terrace outside the River Restaurant. We were having a cream tea there—it is almost like a Cornish cream tea and it reminded me of home—and we got onto the Arab spring. I found myself getting into a political cliché by saying, “Yes, of course are problems in Egypt, Tunisia and Libya, let alone some of the other areas, but democracy is never linear. Things can get worse and then get better”.
	Then I thought, “Stop for a moment. Let us think of the biggest revolution we have had in the past 20 or 30 years”. Of course, that is the disintegration of the Soviet empire, when we had linear improvement in democracy, in market economy, market liberty and security. We had all of that as 10 or a dozen states that had been part of a repressive communist regime moved to liberal democracy as members of the European Union, and as members of NATO. That linear movement was one of the greatest effects of the European Union and one of the ways in which we can see that soft power —that leverage and conditionality to which the noble Lord, Lord Foulkes, referred—has worked. That is one of the greatest benefits from the European Union for world peace and prosperity, and that is definitely not an overstatement.
	It is that benefit and the enlargement instrument that have shown how powerful the European Union can be. One of the great attributes of all UK Governments is that they have been a fundamental motor of that process and that wish to include states, rather than to put to the side or exclude them from the European Union and its predecessors. I certainly believe that process should be spread, if perhaps not everywhere. In fact, in researching for this debate, I noticed one thing which I had forgotten: that Morocco was rejected when an application was made, I think quite rightly. I believe that we should extend European Union membership and candidature, if not as far as possible, then certainly to the east. Perhaps I slightly differ in that from the noble Lord, Lord Foulkes. As long as the states meet all those criteria, we should extend it whether it is to Ukraine or Moldova and even to Belarus, if that could ever be the case, or Armenia. I agree that there may be certain issues in going slightly further east, but that should be our aim. All organisations, as we know, eventually start to move backwards if they are not moving forward.
	As has already been said, one very important area that came out of this report is that ultimately there is no alternative to full membership. Those states would not be satisfied with it, nor would it work. There is the European Economic Area, the associate membership that Turkey has had and the neighbourhood policy for the south and east, none of which is sufficient to satisfy what we would want from European expansion.
	I find I am very critical of how one area has been handled in the European Union. That is the way in which we have been very selective about the timing of candidate countries. When it comes to Turkey, its first application was made in 1987 and 12 years later, in 1999, Turkey became a candidate country. To date, we have opened 13 chapters and closed only one, so there is all that uncertainty. Turkey is a very important economy and candidate country, and Europe is mismanaging that process. Frankly, the worst case of all, which shows all the specific European divisions, is Macedonia. Its application was made in 2004 and its candidature was agreed in 2005 but the number of chapters opened—let alone closed—still stands at absolutely zero. That is utterly unacceptable. We know why this situation exists. It is again because of boundary disputes, particularly name disputes, between that country and an existing member state. We must make sure that we are far more consistent about that.
	Two years ago I went to a conference in Brussels on enlargement, arranged by the then-Belgian presidency. I went with the noble Lords, Lord Harris and Lord Bowness, and the conference was very well attended. We debated enlargement fatigue, and that idea was of course rejected by the delegates. There was a great feeling that we should move forward with enlargement, particularly with the western Balkans. There was only one difficulty with that conference. No parliamentarian from Germany turned up, and not one from Spain. There might have been one from France, but none from Italy. It was an example of how for many of the larger nations, particularly those towards the west of Europe, the enlargement agenda had greatly receded. We need to stop that.
	As we approach the anniversary of 1914, it is so obvious that I again risk a cliché by saying that the travails of Europe from 1914 through to 1989 started in the western Balkans. If there is a sacred mission for Europe, it is integrating the western Balkans into the European Union, under the right conditions. We could then offer security, freedom, a market economy and the type of atmosphere that we would want to live in, not only to the people living in the western Balkans but to Europe as a whole. As other noble Lords have said, it is an irony that although Britain is still foremost in asking for and promoting enlargement, we have started a feeling within the rest of Europe that Britain is itself heading for the exit. That is not just a paradox; it is potentially a contradiction in our policy. It threatens to dilute our ability to champion the cause of enlargement.
	Two months ago I had the privilege of going to the Baltic states for the first time. In Estonia we met the Prime Minister and a number of other political people. One day we went to a town called Kuressaare, on the island of Saaremaa, which looks out across the Baltic. It was of course one of the areas that was formerly part of the Soviet Union, and the authorities were very careful to make sure that it was patrolled. There is a museum about the local Soviet commissars and everything else under the Soviet occupation. Yet Estonia is now one of the most vibrant liberal democracies. The economy is moving upward. The country is a member of the eurozone, and very successful. The country now wants more of Europe to be a part of Europe. We must ensure that that spreads, not only to the western Balkans, but at the right time and under the right conditions to the rest of eastern Europe as well.

Lord Hannay of Chiswick: My Lords, I speak as a habitual complainer about the dilatoriness of the scheduling of debates on the reports of this House’s Select Committee on the European Union, and indeed of other committees. However, it is only fair on this occasion to congratulate the usual channels on having arranged this debate promptly and in a particularly timely fashion, coming as it does when the EU is taking stock of its further enlargement policy.
	The timeliness of the debate is wider than such rather ephemeral considerations. A combination of the distraction of the eurozone crisis, and a certain air of enlargement fatigue, has caused this issue to drift towards the margins of the policy debate about the
	future of the European Union, both in Brussels and elsewhere in Europe. Yet, as is shown by this report, the quality of which owes much to the skilful chairmanship of the noble Lord, Lord Boswell, the further enlargement of the EU is of significant importance to the future security and prosperity of the union, and to its prospects of playing a stabilising role in its immediate neighbourhood and beyond. We would be deluding ourselves if we thought that the process of definitively putting behind us the mayhem which engulfed the Balkans in the 1990s could be achieved without setting all the countries in that region on a sustainable path towards membership. We should equally be deluding ourselves if we thought that we could turn our backs on Turkey, the most vibrant economy in Europe and a rising regional influence, without serious negative consequences for ourselves. We should also be deluding ourselves if we believed that cold-shouldering the European aspirations of countries which emerged from the former Soviet Union to a shaky independence would not further Russia’s ambitions to create for itself a sphere of influence around its borders. Quite a lot is therefore at stake in the way the EU handles its further enlargement, and it cannot be said to be doing so very skilfully or very purposefully at the moment.
	In addition to these general geopolitical considerations in favour of further enlargement, I want to focus on three specific issues: first, the need to avoid importing into the EU existing territorial disputes, either between future member states or between them and their neighbours; secondly, the need to guard against backsliding by new member states on their commitment to the Copenhagen criteria for membership after they have joined the club; and, thirdly, Turkey, where recent developments have been troubling for its friends even though they should not, I would contend, have shaken their fundamental support for Turkish accession.
	With the benefit of hindsight, most people now recognise that the EU’s handling of the accession of Cyprus with the division of the island unresolved was, to use a diplomatic phrase, suboptimal. The report that we are debating said as much, and it has since been roundly denounced for it by both Greek and Turkish Cypriots—a symmetry of denunciation which in my own lengthy and fairly painful experience of trying to resolve the Cyprus problem normally means that you have got it about right. It is not hard to identify similar disputes in relation to the existing candidates and aspirants: Cyprus, again, in the context of Turkish accession; Serbia and Kosovo; Macedonia and Greece; Moldova and Transnistria; and a whole rash in the republics beyond the Caucasus. That does not make them any easier to resolve. In the case of Cyprus’s accession, one can see that the EU would in theory have done better to make settlement of the dispute a condition of accession. However, to have done that at a time when the leader of the Turkish Cypriots, the late Rauf Denktas, and the then Government of Turkey were making any attempts at compromise completely nugatory would have been to hand them a veto which they would not have hesitated to use. There are parallels with some of the future members. Each case will need to be treated on its own merits and the EU needs to address each in a timely and proactive fashion as it is doing, admirably in my view, in the case
	of Serbia and Kosovo. There is no magic solution, no template, for every case. What one can say is that some unilateral attempts at exercising pressure, such as Greece’s continuing blockage on even opening negotiations with Macedonia, are both counterproductive and deplorable. I entirely agree with the noble Lord, Lord Teverson, on that point.
	There is also the problem of backsliding on the Copenhagen criteria and other values and responsibilities of membership. There is experience of that in the cases of Bulgaria, Hungary and Romania. It has become painfully evident that the EU is better placed to handle such problems before a country has joined the Union than it is afterwards, although some instruments are available even after accession, if extremely hard to apply. Again, as in the case of international disputes, there are no obvious, easy and universally applicable solutions, but it seems desirable to ensure that, before a country accedes, the basic values which justify its membership are firmly entrenched in that country’s laws and constitution, and that the machinery to uphold those values is in good working order. I rather doubt whether new dispositions for handling post-accession transgressions will prove either negotiable or operable.
	Recent events in Turkey cannot have left any of Turkey’s friends untroubled. Even before the demonstrations in Istanbul, the repression of critical press comment had cast a dark shadow over the remarkable progress made in recent years. The peaceful demonstrations were, from the outset, met with the disproportionate use of force, and the Turkish Prime Minister’s rhetoric has been extremely divisive. That said, it is equally important to say what this is not; it is not a series of events in any way analogous to the uprisings in the Arab world against undemocratic dictators. Turkey is a working democracy, and it is for Turks, using their democratic institutions, to work out their solutions to the problems and protests that have emerged, while above all respecting the rights of citizens to peaceful protest and to express their views through a free press.
	What role should outsiders play? They should certainly not, I would argue, block or suspend the already pretty stagnant process of Turkey’s EU accession negotiations. One thing comes clearly through the pages of the report that we are debating: the EU’s ability to influence candidate countries varies in proportion to the progress being made in the technical aspects of the accession negotiations. If that process moves along, long though it may be—and the process with Turkey has a long way to go—and if it is on a clear and sustainable path, the EU can exercise real conditionality and can hope to have real influence; if not, it cannot.
	As a steady supporter of Turkish accession, I hope that the Government will maintain that case, while making it clear that Turkey’s eventual accession will require unquestioning and credible adherence to the Copenhagen criteria. In that context, the agreement reached in the Foreign Affairs Council yesterday to delay the opening of the next chapter of Turkey’s accession negotiations until the autumn, while perhaps better than some of the alternatives, merits no more than one cheer.
	As we in this country debate our future in the European Union—and I welcome the Prime Minister’s recent statement that our future lies in the European Union—it is surely essential that we develop a positive reform agenda for the EU as a whole. Within that agenda, I would argue, the further enlargement of the EU should have a prominent place.

The Earl of Sandwich: My Lords, I thank my noble friend for his balanced introduction to the debate. It has been a pleasure to work on this report because it shows the European Commission at its very best. If we must have an EU referendum, surely the progressive enlargement of the European Union in the Balkans is one of the strongest arguments for a yes vote. The war in the former Yugoslavia is still a recent and bitter memory for the communities involved.
	As the noble Lord, Lord Foulkes, said, it is undeniable that there has been greater stability in Europe since the Kosovo war ended with the KFOR-Serbia treaty of June 1999 and the EU in its various forms took over responsibility. Every new member of the EU has benefited economically from trade within the EU —even more recently while the older member states have suffered recession. This debate is timely, not because the UK is quietly marking its ruby anniversary in the EU but because in a few days, as we all know, Croatia will become the latest example of enlargement as the 28th member of the Union, following Bulgaria and Romania.
	Perhaps we can now dispense with the phrase “enlargement fatigue”, since more candidate states and even eastern neighbours, such as Ukraine, are in the pipeline to the EU, as the noble Lord, Lord Teverson, said. Perhaps this is a moment for us to congratulate the Ukrainian tennis player, Sergiy Stakhovsky, for conquering the long-term Wimbledon champion this evening. Yet the road to enlargement in most cases will be painfully slow and beset with obstacles, and some may never make it. Indeed, I believe, in the case of Turkey, EU membership may not be an ideal solution.
	Kosovo, one of the potential candidates, which seems to have the furthest to travel, nevertheless at times symbolises the EU’s determination to move forward. Perhaps that is because, as the noble Lords, Lord Foulkes and Lord Hannay, said, it does not want to make the Cyprus mistake again. Peace in Kosovo today is one of the cornerstones of EU foreign policy, stoutly defended by the EEAS through various policy channels. It is a major EU project. In fact, it is the largest recipient of EU investment per head anywhere in the world. Quite apart from security guarantees, there is a huge human and financial investment in Kosovo’s future as Europe’s youngest independent country. Yet, for their own reasons, Cyprus, Greece, Spain, Slovakia and Romania are still refusing to recognise it. Even some of its neighbours—as I will mention later—will not invite it to their regional meetings.
	Much depends on Serbia. As a result of a carefully crafted diplomatic effort over the last two years, an important agreement was reached—as the noble Lord,
	Lord Boswell, mentioned—between Belgrade and Pristina in Brussels on 19 April. Indeed, an earlier agreement was announced by Commissioner Füle on the very day that the committee took evidence from him in Brussels. Just two more border points between Kosovo and Serbia had been established. I well remember the excitement in the Commission that yet another small but significant step had been achieved. Implementation followed in May. The noble Baroness, Lady Ashton, met Prime Ministers Dacic and Thaçi last Thursday and reported on Friday that the EEAS had reviewed the implementation plan and that there had been concrete progress and further agreements on justice, police and the forthcoming municipal elections. This is important detail and much is owed to the recent meeting of Serbia’s First Deputy Prime Minister, Aleksandar Vucic, with representatives of northern Kosovo Serbs in Belgrade. There, he commendably laid down the law to the four mayors and councillors.
	The EU’s approach is nothing if not methodical and this seems to be achieving political results, which are remarkable when set against the violence of civil war only 15 years ago. Yet we know that, under the surface, the old rivalries are simmering. The worst forms of extortion and corruption can still be found as much within the KLF ex-combatants now in power in Kosovo as among the criminal mafia and the Serb no-go areas in the north. The EU is still, of course, backed by NATO in any emergencies such as shooting incidents in Mitrovica, but the key Copenhagen principles of the rule of law, human rights and democratic government are at stake.
	On the rule of law, the EU has a long way to go and even, at times, appears to be losing the battle. The project known as EULEX, the biggest tool in the EU’s armoury, is failing to meet its objectives. The European Court of Auditors reported last October that its assistance had not been effective, levels of organised crime and corruption in Kosovo remained high and the judiciary continued to suffer from political interference, inefficiency and a lack of transparency and enforcement. The court found that there had been no progress in establishing the rule of law in the north. That is a serious matter but the ECA report did not surprise the people of Kosovo, who for some time have watched the failure of the EU’s flagship project—which employs hundreds of judges, barristers, police and other officials. The UK has been one of the key investors, so can the Minister explain how this vital project has foundered? What action has been taken since to reform and rebuild the EULEX programme?
	Beyond Kosovo and Serbia there have been many other concerns about justice and the rule of law in the region. The situation in Romania and Bulgaria has already been mentioned. Our report is another reminder that the co-operation and verification mechanism process used in those countries must come at the very beginning and not as an afterthought. That is also relevant, as has been said, to Kosovo and Serbia. Our report makes much of these processes and formulae such as the Copenhagen criteria. That reminds me that people working on EU issues must be careful not to use too much jargon or too many clever acronyms or we will be seen for what we are: an in-group with a temporary
	knowledge of EU institutions who speak a language only we can understand. Of course, I make a general point.
	The Committee also notes that the great fears expressed about the effects of enlargement on the Common Agricultural Policy turned out to be unnecessary. The proportion of agriculture in the EU has risen and is still rising with the accession of new members. The NFU and other witnesses have expressed concerns about lower standards of cultivation and flouting of health and safety, but these tendencies have not prevented a healthy trading partnership between old and new member states.
	We must not forget that poverty persists in many areas of former Yugoslavia, including parts of Kosovo, where our DfID office has only recently closed, for a reason that I still cannot fathom. While Croatia is level with Hungary in terms of gross national income per head, at about $13,000, the average income in Albania, Kosovo, Bosnia and even Serbia is less than half that, below $6,000 per head. Through the EEAS and the Commission, the EU sometimes has to fill the combined roles of a teacher and a nanny on local government or regional co-operation, and I wonder whether it has the necessary skills.
	Take the fiasco of the Ohrid summit this month, for example. It was a regional meeting, scheduled for 1 and 2 June in the Macedonian beauty spot. The summit was cancelled after Albania and Croatia announced that they would not attend because Kosovo had not received an invitation, which was in clear breach of the April agreement. There is no point in having agreements if they are not implemented. Like it or not, the EEAS has to be sure not only that the parties follow them to the letter but that the neighbours do as well. This may be a tall order in the Balkans, but it is the litmus paper of the success of enlargement.
	The balance of competence review is coming soon, we hope, and it will confirm that we are on the whole getting satisfaction in Europe. I trust that this understanding continues well beyond the next election.

Lord Kilclooney: My Lords, I first congratulate the noble Lord, Lord Boswell, and the members of his European Union Committee on this excellent report, which clearly outlines the opportunities and challenges as nations apply to join the European Union as new members. As the noble Lord said, it is timely that this report be debated in this House: not simply because Croatia is likely to be confirmed as a new member this week, but also because there are ongoing issues of major importance at this time. For example, there is the European Union and United States trade agreement; CAP reform, which I hope may be confirmed this week, especially for Scotland and Northern Ireland, where agriculture is important; and the ongoing major issue of banking union within the EU.
	I well remember that when I was a member of the European Parliament in Strasbourg, we regularly met the Prime Minister of the United Kingdom. One occasion always stuck in my head. The Prime Minister said: “You should encourage greater enlargement of the European Union, because the more countries that
	join, the more likely it is to collapse”. That was the understanding of what enlargement would mean in practice. There could be some truth in it. Croatia is now about to become a member and yesterday it was agreed to commence Serbia’s accession negotiations and an association agreement with Kosovo as well. Of course, all this is subject to the approval of the European Council, but enlargement is ongoing.
	One of the conditions is that new members in the European Union should also accept the euro as their currency. The Chancellor in his Statement on the economy today said that the eurozone is in crisis. That phrase has been used by several contributors to this debate this evening. It is the case in Portugal, Spain, Greece, Greek Cyprus and the Republic of Ireland; you have only to look at the Financial Times today to see the leaked tapes about the banking situation in the Anglo-Irish Bank to realise that there are ongoing problems in the eurozone. There are increasing fears about Italy as well over the next six months. As recently as last week, a senior French Minister said that the worst in France is yet to come. So the question arises: should accession of new members to the European Union require compulsory membership of the eurozone? Why not provide them with the same opportunity as the United Kingdom to be a member of the European Union but not a member of the eurozone?
	Turkey was mentioned in the report. I well remember the European Council meeting in Luxembourg. Perhaps Members of our House have forgotten the events of that lengthy session, which went on and on until one minute before midnight, when it came out with a compromise—the deadline was midnight. The compromise was that Croatia and Turkey could apply to join at the same time. That was then agreed by the European Council.
	I come from the island of Ireland, and I recognise sectarianism when I see it. As a Member of the European Parliament, I recognised that France and Germany would not agree to 80 million Muslims coming into the European Union. I remain convinced that that is the underlying problem as Turkey tries to become a member of the European Union. As has been mentioned, Turkey has its problems. Democracy in any country is not simply rule by the majority, it also requires the consent of the minority, and that does not seem to apply in Turkey today. We have the decision yesterday to start further accession talks on Turkey, which has aroused opposition from Germany, France, Austria and Greek Cyprus. It seems difficult to foresee Turkey being able to join the European Union, and I say that as one who has been a friend of Turkey for 40 years. It may well be that Germany is right and that a special arrangement with Turkey is now the way forward.
	There has also been reference to Cyprus. I am delighted to see that the committee has stated in its report that it was wrong to allow Greek Cyprus to join on its own. The decision to allow EU membership before a settlement was foolishness in the extreme, and many of us said so at the time. However, the application was supported by Her Majesty’s Government on the recommendation of its advisers on Cyprus. They should
	now all hang their heads in shame, and many of them are now publicly doing so. Only last week, I heard one who was involved in the discussions saying so.

Lord Hannay of Chiswick: I am most grateful to the noble Lord for allowing me to intervene to say that I am not hanging my head in shame. I explained the situation in my speech, which perhaps the noble Lord did not hear properly. I did not say, and the report does not say, that Cyprus should not have been admitted. It states that the European Union was not sufficiently zealous at ensuring that a solution was reached before.

Lord Kilclooney: I have to say that I heard the noble Lord’s speech and listened to it very carefully. I have to say that his opinion at the time of the accession of Cyprus was wrong and that some of those who agreed with him at the time now say that it was wrong and are apologising. I hope that, some day, he will do the same.
	On Cyprus, reference has been made to Turkey’s role, but Turkey encouraged the Turkish Cypriots to vote for the Annan settlement—oh yes—and the Turkish Cypriots voted for the settlement in Cyprus. It was the Greek Cypriots who voted against the United Nations Annan plan for a settlement, so it is wrong to finger Turkey, as is suggested in the report; it was others who created the problem.
	In foreign affairs and security, the EU has only France and the United Kingdom really to rely on, because they are members of the United Nations Security Council. The others will talk a lot but do very little. As enlargement proceeds, questions should also arise as to whether the EU should cease to have a role in foreign affairs and security.
	In conclusion, clearly the European Union needs to revise existing treaties as it considers a revised relationship with the United Kingdom itself.

Baroness Hayter of Kentish Town: My Lords, today is quite special for me. It is the first time that I have spoken in your Lordships’ House on Europe, yet I am a child of that project, my life having followed the momentous moves that we have seen on the post-war continent. I was born to a member of the occupying forces in Germany in 1949. I worked in Brussels from 1 January 1973, the day on which we joined the Common Market. I have been involved in the EU as it went from six to nine to 12 to 15, and shortly it will be 28. Particularly on that other 9/11, 9 November 1989, I watched as the wall began to fall. Then I worked in the European Parliament as the enlarged Germany took its place in the then European Community.
	The EU, for many of us, embedded post-war security and democracy, then went on to help Greece, Spain and Portugal shake off their pasts and enter the democratic family. As we have just been reminded, just days away we will similarly welcome Croatia. As the noble Baroness, Lady Ashton of Upholland, the EU’s High Representative, has said, Croatia’s membership is good for it, but also for the rest of the EU.
	This is a timely debate. It enables us to pay tribute to those who helped bring this about and to note how this accession of Croatia reminds us of the journey that Europe has made and how far a country like Croatia has come towards a more peaceful and prosperous future. That is not to say that there are no lessons to be learnt. We also pay tribute to the excellent report that is typical of the analysis that your Lordships’ committee brings to its work under the leadership of the noble Lord, Lord Boswell, to which the noble Lord, Lord Hannay, has already paid tribute.
	That analysis is much needed when attitudes to Europe are driven by emotion rather than rational calculation of our national interest and when the governing party engages in some meaningless posturing with the European Union (Referendum) Bill, as it will do in the debate in another place next week. Today we are talking not about pulling out, about a smaller Europe, but about EU enlargement, a proud achievement of the previous Government. When Labour came into office in 1997, Europe had dithered for eight years about enlargement after the fall of the Berlin Wall. There was talk of long delays, of eastern countries moving slowly towards membership, with perhaps two or three joining in five years and others perhaps never to join.
	Labour took a bolder approach, helped by Lionel Jospin in France, Gerhard Schroeder in Germany and the enthusiastic Commission president, Romano Prodi. Even more, the 1999 Kosovo conflict was a wake-up call, demonstrating the risks that Europe was running post-Cold War. The division of Europe into two opposing blocs had disappeared, but we risked a return of ugly nationalism, ethnic cleansing and mass murder; a risk that the European Union was not prepared to tolerate. Just as, in earlier years, the EU had helped cement democracy in Spain, Portugal and Greece, so now it knew that enlargement could help the new emerging democracies gain independence and self-respect in a framework that guaranteed stability and the rule of law, while the single market and structural funds promoted economic development. Ten new democracies joined in a big bang in 2004, with Bulgaria and Romania set for membership in 2007.
	To those who say that the EU can never change, this was the biggest transformation in its history. Did Europe get it absolutely right? The report offers some legitimate points of criticism, albeit in very diplomatic language. Some member states were not as ready as they might have been. There have been concerns about criminal gangs and the functioning of the Bulgarian state. There are allegations of systemic corruption in Romania. In several countries, the legislation for equality of treatment for the Roma has been honoured only in the breach. Some new members even show signs of regression to a darker past. There are concerns about the Government in Hungary. Constitutional changes have packed the courts and the central bank with government cronies, limited the ability of opposition parties to function and even curtailed freedom of the press and of religion. Tragically, anti-Semitism is again literally on the march within the boundaries of the Union.
	However, we would not have solved these problems by keeping those countries out of the EU. Indeed, increasing their isolation and inhibiting economic development would have aggravated those very problems. But once countries are in, they must live up to the obligations of membership. There must be no backsliding, to use the words of the noble Lord, Lord Hannay. There is a suspicion around that the Government have pulled their punches in criticising the Hungarian Government because they see Hungary as an ally in their search for some sort of looser relationship with Europe. Shame on them if that is the case. There should be no loosening of the EU’s commitment to democracy and human rights. If breaches of these principles increase, action must be taken.
	The EU can be a positive force for change in applicant states, both before and after entry, as has been made clear during the debate. The EU helped Slovakia on to a democratic path and secured fairer treatment of its Hungarian minorities. Croatia will join on 1 July, having accepted that the price of membership was to surrender suspected war criminals to international justice. It has made great steps in order to satisfy the criteria, to the benefit of its people. Serbia has shown flexibility on the Kosovo question, the incentive being the opening of membership negotiations, as described by the noble Lord, Lord Boswell. That is why enlargement should continue.
	What about the argument that enlargement has led to more migrants than we can accommodate? Well, we underestimated the numbers who would come here after 2004, and there were adverse consequences for the wages of the low-skilled, and pressures on housing, but the answer is not to blame the Poles or other migrants or the policy of enlargement. It is to build more housing and to ensure that the minimum wage is enforced. It is exactly in order to prevent wage undercutting that Labour will try to get the posted workers directive revised because, I am sad to report, the Government are failing to tackle the exploitation of foreign workers, which leads to the undercutting of local workers. The Government are failing to enforce the national minimum wage. They have taken no action on agencies recruiting only from abroad and no action to extend the gangmasters licensing legislation. Furthermore, they have failed to champion the enormous contribution EU migrants make to our hospitality and healthcare sectors. Indeed, I sometimes think that our social care system would be near collapse without them, while had we implemented UKIP’s policy of EU withdrawal and sent eastern Europeans home, we would have to handle the return of elderly Britons who had retired to France, Portugal or Spain but who would no longer be entitled to live there.
	We stand behind enlargement, as we stand behind our membership of the EU. It has achieved enormous good and it can, and I believe will, achieve far more.

Baroness Warsi: My Lords, I thank the noble Lord, Lord Boswell, for introducing this important debate and for his and his committee’s role in bringing
	the important issue of EU enlargement under the spotlight in this inquiry. The report and this debate are timely. As many noble Lords mentioned, in just four days, Croatia will join the European Union as the 28th member state. It does so at a time of economic crisis amid debates about the future of the euro area and the Union itself, and as we seek to ensure that the enlargement process remains fit for purpose, having learnt the lessons from previous enlargements.
	I welcome the cross-party support shown by this House towards EU enlargement. The Government believe that this support is justified. As the report under debate recognises, enlargement offers benefits to the UK, the EU and the candidate countries themselves. First, there are political benefits, as the power of enlargement drives reform. Secondly, there are economic benefits, as the benefits of political reform help create a larger and more prosperous single market. Thirdly, there is the benefit of security, as better-functioning states, integrated and at peace with their neighbours, reduce the space for organised crime and corruption, and help to spread peace and stability across the region. However, to ensure a credible enlargement policy, progress must be based on candidates meeting the proper standards—as set out in the Copenhagen criteria and the EU’s acquis—through firm, but fair, conditionality. The noble Baroness, Lady Hayter, highlighted some of these challenges. I can assure her of the Government’s commitment to these standards, and to the values of the Union.
	Croatia’s accession demonstrates this clearly. Croatia will be the first western Balkan country that was involved in the conflicts of the 1990s to join the EU. That itself is evidence of the transformative power of the European Union. The end of six years of the toughest accession negotiations yet will be marked on 1 July; Croatia is joining the EU better prepared than any previous candidate. As Croatia’s Deputy Prime Minister has said, the reforms have,
	“changed the country beyond all recognition”,
	with Croatia the first country to negotiate under the new Chapter 23, which specifically addresses rule of law reforms. Our confidence that Croatia would be ready in full by 1 July was further enhanced by the introduction of pre-accession monitoring, when we agreed to close accession negotiations in June 2011.
	The process of transformation will not stop when Croatia joins the EU. Membership provides the foundations for Croatia to continue to tackle domestic challenges; offers opportunities to harness the potential of the single market and to co-operate with member states in tackling cross-boundary challenges such as climate change and organised crime more effectively; and provides the tools to help Croatia return to sustainable, competitive growth through access to the world’s biggest single marketplace and to the EU’s structural and cohesion funds. Croatia’s success is important as a catalyst in the region, too. It provides the clearest example for its neighbours that political will and determination to push through reforms are absolutely necessary—but also that the EU also delivers its side of the bargain in return.
	Embedding rule of law reforms in accession countries is fundamental to the success of enlargement. Rule of law reform has been central to Croatia’s progress,
	as the EU took on board the lessons learnt from the previous accession. The process continues to evolve. Under the “new approach”, Montenegro and all future candidate countries will address rule of law issues up front in their accession negotiations, which will maximise the time available for implementing and embedding reforms.
	It is not just the political conditionality that is evolving. In the context of Europe’s economic challenges, the Council’s conclusions on the European Commission’s 2012 enlargement strategy flagged that enlargement must also deliver economic success, not least given the current requirement for new member states to join the euro area. This is also crucial to ensuring that EU membership remains a strong incentive for aspirant countries. The Government are committed to the principle that eventual membership is open to all European countries, so long as they meet the criteria as set out in the EU treaties. We share the view set out by the committee in its report that there are no viable alternatives to EU enlargement.
	My noble friend Lord Teverson referred to other, looser associations for aspirant countries to have with the EU, such as the European Economic Area. However, I agree with him that the prospect of membership is often the only thing strong enough to overcome the powerful vested interests that too often stand against political and economic reforms. It is therefore vital that the EU both maintains momentum on the enlargement process and ensures that it delivers on its side of the bargain. We should not forget the opportunity costs of turning countries away from Europe.
	The risk that candidates may tire of the struggle if rewards are not forthcoming is real, as the committee’s assessment notes. That is one reason why the UK has supported innovations in the enlargement approach, such as the new approach to rule of law issues. Ensuring that candidates can start to feel the benefits of their reforms early on can help reinforce the necessary political commitment. It is the responsibility of every member state to ensure that this momentum is sustained. Artificial pauses, which some call for to resist what they fear is an inexorable expansion, are misleading and damaging. They can damage the confidence of aspirants in the EU’s credibility and impact on the long-term benefits of EU enlargement. Such calls are also predicated on the misunderstanding that enlargement is inevitable: progress towards accession is based on candidates’ own merits, and is far from guaranteed. It is also important for the integrity and continued momentum of the enlargement process that bilateral issues are managed constructively and do not affect EU enlargement policy or any candidate’s accession negotiations. Ensuring the continued centrality of the spirit of good neighbourly relations is therefore vital. As long as the accession process remains adaptable to the conditions of each country, able to respond flexibly to new pressures and to learn from past mistakes, the process of negotiations should not be a barrier to individual countries’ progress.
	The noble Lord, Lord Foulkes, and my noble friend Lord Teverson referred specifically to the Prime Minister’s view. The Prime Minister’s vision for a better Europe is central to our conditions-based approach to
	enlargement. We take strength from the EU’s expanding membership, which is essential in bringing creativity and expertise to the EU. In fact, further enlargement increases this diversity and creativity, but further enlargement does not simply mean more Europe.
	The noble Lords, Lord Foulkes, Lord Hannay, and Lord Kilclooney, and my noble friend Lord Teverson raised the issue of Turkey. The Government continue to support strongly Turkey’s accession. In December, the UK worked hard with other pro-Turkey member states to secure enlargement conclusions endorsed by the European Council, which reaffirmed the EU’s commitment to an active and credible accession process. The Turkish Government welcomed these. The enlargement conclusions we secured in December 2012 were forward-looking and gave the Irish presidency and EU institutions a strong mandate to make real progress in 2013. We welcomed recent improvements in relations between France and Turkey and France’s decision to lift its block on Chapter 22 on regional policy. We are pleased that, despite last-minute German concerns, a deal was reached on Chapter 22 allowing a technical opening. I note the concerns of the noble Lord, Lord Hannay, but, like him, I believe, and the Government believe, that progress on the accession process is the best way to support Turkish reform. Now more than ever the EU needs to engage with Turkey. The recent protests serve to highlight the strategic imperative of EU support to Turkey’s accession process as a driver of domestic reform.
	The noble Lord, Lord Foulkes, also raised the issue of Serbia’s recognition of Kosovo. I agree with the conclusions of the report that bilateral disputes should not play a role in the accession process. The pull of the EU has already delivered considerable progress in the normalisation of Serbia’s relationship with Kosovo. Part of the April dialogue agreement was a clear commitment from Serbia not to block or encourage others to block progress on Kosovo’s EU path.
	My noble friend Lord Boswell also raised the issue of the IPA. The Government share fully the committee’s view of the importance of a strategically targeted instrument for pre-accession assistance. We have pressed strongly for a more results focused instrument closely linked to the objectives of the enlargement strategy for the period 2014 to 2020.
	My noble friend Lord Boswell and the noble Lord, Lord Foulkes, also questioned whether enlargement was losing its momentum. The strategic benefits of enlargement for both current and future members will be realised only if the process is an economic and political success. To achieve this is likely to need time, with each country only moving forward as and when it is ready, once it has addressed its specific challenges. Clear results over time will enable us to communicate and demonstrate the ongoing benefits to EU citizens. The EU needs to facilitate enlargement, but the rate of progress needs to be determined by the aspirant countries themselves.
	The noble Earl, Lord Sandwich, asked about Kosovo and specifically about the EU’s rule of law mission in Kosovo. The Government believe that this has a vital role to play in enabling Kosovo to meet EU standards in the rule of law. The mission has had several successes,
	including customs standards, integrated border management and the return of the remains of nearly 300 individuals missing since the war. The UK currently seconds around 37 staff to the mission.
	The noble Lord, Lord Hannay, spoke of the impact of bilateral disputes. He mentioned Cyprus as a clear reminder of the need to seek ways to avoid the importation of bilateral disputes into the enlargement process. On this, the Government share the committee’s views fully. We will continue to work with the Commission and other member states to encourage an open and transparent approach to resolving disputes and to explore mechanisms to protect the momentum of the enlargement process.
	EU enlargement remains as relevant today as it ever has been, notwithstanding the changing economic and political landscape in Europe. It is a vital tool for Europe in promoting democracy, encouraging freedoms and increasing the potential of the single market to the benefit of aspirant countries and existing members. The Government’s vision of a reformed EU is therefore not just compatible with but mutually supportive of a robust and successful enlargement policy that delivers increased diversity and a larger single market, ensuring that countries are fully prepared to contribute positively to a more effective EU upon their membership.
	The next step in the process of reuniting Europe lies in tackling the remaining challenges of the western Balkans and reinvigorating Turkey’s accession process. Rule of law, migration and other challenging issues can and must be addressed, through rigorous conditionality, to deliver the foundations for secure and successful future member states, maintaining the credibility of enlargement as a lever for reform and ensuring that the benefits it promises can be realised.
	Therefore, once again, I welcome the committee’s report. It is a reminder that, although there are challenges to be addressed, we remain unwavering in our support for further EU enlargement, that to sustain the momentum the EU needs constructive approaches from its member states, and that the EU and its member states need to better communicate the benefits of enlargement to people across the EU and to aspirant countries.
	This Government will remain an active champion of further conditions-based EU enlargement. I therefore warmly welcome the European Select Committee’s support for the enlargement agenda. The thoroughness of the committee’s examination of these issues will continue to provide a valued contribution to our policy formulation.

Lord Boswell of Aynho: My Lords, at this late hour, it would perhaps suffice if I were to comment on the quality and absorbing nature of this debate, and on the remarkable staying power displayed by my colleagues on the Select Committee and others who have participated in it.
	However, I think that I should take just a moment further than that to reflect on the fact that, while there are always differences of emphasis and occasionally of substance, generally there has been what I would describe—I include in this both Front Benches and the other contributions—as a steely consensus behind getting on with this job and a belief that it is possible, not in a spirit of recrimination or rehashing the past, to learn lessons and get on with the next stage of enlargement. That I find very encouraging.
	It would be inappropriate to comment on each speech, but perhaps I may break from that and refer just for a moment to the noble Lord, Lord Teverson. He has made a distinguished contribution tonight but I should like, in particular, to reflect on the fact that he has recently left the chair of our External Affairs Sub-Committee, which he served with great distinction. That has in no sense been diminished tonight and we are very grateful for his contributions both tonight and on earlier occasions.
	It is generally the case that, in this House at least, matters connected with the European Union are treated seriously, sensibly and constructively. I think that we have generally met those obligations. Equally, there is a sense of diffidence or restraint because we know that this is not an area in which the United Kingdom would expect to take unilateral action or where we should expect magic solutions immediately. We need to continue to work patiently with other member states and with our friends who see this agenda as important. I should perhaps have recorded that we need to continue what has been a very constructive dialogue with Commissioner Füle and his Cabinet and other members of the Commission who are also committed to these objectives. We need to keep the process very much at the forefront of our attention. I think that what we have done in our report—I add modestly—is at least to set the climate for doing that and to point to the opportunities and benefits of doing so.
	Motion agreed.

House adjourned at 10.25 pm.